No.

97-10392

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff._Appellee,

v.
t _

CONNIE ARMSTRONG, JR.,

I

Defendant_Appellant.

APPELLEE'S BRIEF

APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DISTRICT COURT NO. CR-94-276-CAL

ROBERT S. MUELLER, IXI

United states Attorney
Northern District of California

J. DOUGLAS WILSON
Chief, Appellate Section

GEORGE D. HARDY
Assistant United States Attormey

RONALD Do SMET_NA
Special Assistant U.S. Attorney

450 Golden Gate Ave.

San Francisco, CA 94102
Telephone: (415) 436-7183

Attorneys for Plaintiff-Appellee

UNITED STATES OF AMERICA
 No. 97-10392

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

CONNIE ARMSTRONG, JR.,

Defendant-Appellant.

APPELLEE'S BRIEF

APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DISTRICT COURT NO. CR-94-276-CAL

ROBERT S. MUELLER, III

United States Attorney
Northern District of California

J. DOUGLAS WILSON
Chief, Appellate Section

GEORGE D. HARDY
Assistant United States Attorney

RONALD D. SMETANA
Special Assistant U.S. Attorney

450 Golden Gate Ave.

San Francisco, CA 94102
Telephone: (415) 436-7183

Attorneys for Plaintiff-Appellee

UNITED STATES OF AMERICA
 TABLE OF CONTENT8

ISSUES PRESENTED • ,o.Q.,,,,,ooo 1

JURISDICTION Io..,.o.ooo .2

BAIL STATUS . ,aot..o ,...,oooo.o2

STATEMENT OF PROCEEDINGS ................... 2

STATEMENT OF FACTS ................... 4

A. An Overview ........... 4

B. Armstrong's Operation of Hamilton Taft • 6

C. The Information Armstrong Withheld From

His Victims ............. 20

SUMMARY OF THE ARGUMENT . 22

ARGUMENT 24

I. THE EVIDENCE WAS SUFFICIENT TO SUPPORT ARMSTRONG'S

CONVICTIONS ................. 24

A. Standard of Review

B. The Government Established Beyond a Reasonable

Doubt that Armstrong Engaged in a Scheme
to Defraud ................. 24

i• Armstrong improperly diverted funds from

Hamilton Taft ............. 25

2 • Armstrong fraudulently induced clients to

contract with Hamilton Taft ....... 27

o Armstrong engaged in a cover-up ..... 28

CI The Government Established Beyond a Reasonable

Doubt that Armstrong Transported Stolen Property
in Interstate Commerce ..... 30

II. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION BY

REFUSING TO ADMIT INTO EVIDENCE A HEARSAY DECLARATIOIN
THAT DID NOT MEET THE REQUIREMENTS OF FEDERAL RULE OF
EVIDENCE 804(b) (3) ...... _ 33

A. Standard of Review .......... 34

 B. Discussion . 34

III. THE DISTRICT COURTAPPROPRIATELYREJECTED ARMSTRONG'S

PROPOSED"THEORY OF THE DEFENSE" INSTRUCTION 41
A. Standard of Review .............. 42

B. Discussion .................. 43

IV. THE TRIAL COURT'S EX PARTE CONTACTWITH THE JURY DOES

NOT PROVIDE A BASIS FOR REVERSAL .......... 49

A. The Court's Ex Parte Contact with the Jury . 49

B. The Law of the Case Precludes Reconsideration of
the Impact of the Court's Ex Parte Contact with
the Jury ............... 53

C. Standard of Review .............. 55

D. The Submission of the Transcript to the Jury Was

Not Error ................. 56

E. Any Error in Communicating with the Jury Ex Parte

Was Harmless ............... . . 60

CONCLUSION ...................... 63

NOTICE OF RELATED CASE ................... 64

CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 32(e) 65

 TABLE OF AUTHORITIES

CASES

Delaware v. Van Arsdall, 475 U.S. 673 (1986) ....... 34

In re Hamilton Taft, 53 F.3d 285 (9th Cir. 1995),

vacated as moot, 68 F.3d 337 (9th Cir. 1995) ....... 42-48

Jackson v. Virqinia, 443 U.S. 307 (1979) 24

Masoner v. Thurman, 996 F.2d 1003 (9th Cir.),

cert. denie_______dd,
510 U.S. 1028 (1993) ........ 59

United States v. Amlani, Iii F.3d 705

(9th Cir. 1997) ............. 54

United States v. Barraqan-Davis, 133 F.3d 1287

(9th Cir. 1998) .............. 61

United States v. Beecroft, 608 F.2d 753

(9th Cir. 1979) ................ 30

United States v. Binder, 769 F.2d 595

(9th Cir. 1985) ................... 56, 58

United States v. Bohonus, 628 F.2d 1167 (9th Cir.),

cert. denied, 447 U.S. 928 (1980) ..... 3O

United States v. Cuddy, 147 F.3d iiii

(9th Cir. 1998) ............ 53, 54

United States v. Collicott, 92 F.3d 973

(9th Cir. 1996) ................ 34

United States v. Contreras, 63 F.3d 852

(9th Cir. 1995) .................. 24

United States v. Felix-Rodriquez, 22 F.3d 964

(9th Cir. 1994) 57

United States v. Frazin, 780 F.2d 1461 (9th Cir.),

cert. denied, 479 U.S. 844 (1986) 6O

United States v. Freedson, 608 F.2d 739

(9th Cir. 1979) 59

United States v. Garibay, 143 F.3d 534

(9th Cir. 1998) • • • • • 34

iii
United States v. Goode, 814 F.2d 1353
(9th Cir. 1987) ..................... 24

United States v. Green, 745 F.2d 1205 (9th Cir. 1984)

cert. denie______dd,
474 U.S. 925 (1985) .......... 30

United States v. Heath, 970 F.2d 1397 (5th Cir.),

cert. denie_____d, 507 U.S. 1004 (1993) .......... 32

United States v. Hernandez, 27 F.3d 1403 (9th Cir. 1994),

cert. denied, 115 S. Ct. 1147 (1995) . 51, 56-57

United States v. Hernandez, 105 F.3d 1330 (9th Cir.),

cert. denie______d,118 S. Ct. 227 (1997) ........... 24

United States v. Hubbard, 96 F.3d 1223

(9th Cir. 1996) ............. 24

United States v. Knapp, 120 F.3d 928 (9th Cir.),

cert. denied, 118 S. Ct. 417 (1997) 43

United States v. Lothian, 976 F.2d 1257

(9th Cir. 1992) ................. 61

United States v. Lujan, 936 F.2d 406

(9th Cir. 1991) .................... 58

United States v. Montgomery, 150 F.3d 983 (9th Cir.),

cert. denie______d,119 S. Ct. 267 (1998) ...... 58

United States v. Morales, 108 F.3d 1031

(9th Cir. 1997) (en banc) ........ 34

United States v. Olano, 507 U.S. 725 (1994) 59

United States v. Ortland, 109 F.3d 539 (9th Cir.),

cert. denie______d,118 S. Ct. 141 (1997) ............ 34

United States v. Paquio, 114 F.3d 928

(9th Cir. 1997) .................... 37, 40

United States v. Poole, 557 F.2d 531

(5th Cir. 1977) ............... 32

United States v. Rasheed, 663 F.2d 843 (9th Cir.),

cert. denie______d,454 U.S. 1157 (1981) .......... 5

United States v. Rincon, 28 F.3d 921 (gth Cir.),

cert. denie_____dd,
513 U.S. 1029 (1994) . • ...... 56

iv
United States v. Sacco, 869 F.2d 499
(9th Cir. 1989) ...................... 56

United States v. Sarno, 73 F.3d 1470

(9th Cir. 1985) ............. 43

United States v. Slauqhter, 891 F.2d 691

(9th Cir. 1989) ............... 39
United States v. Throckmorton, 87 F.3d 1069 (gth Cir. 1996),
cert. denie_____d, 519 U.S. 1132 (1997) ........ 56

United States v. Warren, 25 F.3d 890

(9th Cir. 1994) ................. 43

United States v. Zarate-Martinez, 133 F.3d 1194 (9th Cir.)

cert. denie___d, 119 S. Ct. 123 (1998) 54

STATUTES AND RULES

ii U.S.C. § 547(b) ...... • ............. • 45

18 U.S.C. § 1343 • • • • • • • • • • • • • • • • • - • • • • • 3

18 U.S.C. S 2314 ............ 2, 3

18 U.S.C. § 3231 • • • • • • • • • 2

28 U.S.C. § 1291 ......... • ............. 2

Fed. R. App. P. 4(b)

Fed. R. Crim. P. 43 . ........... 55

Fed. R. Evid. 804(b) (3) ............ • 23 , 35-41

 No. 97-10392

IN THE

UNITED STATES COURTOF APPEAL

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

V.

CONNIE ARMSTRONG JR.,

Defendant-Appellant.

BRIEF OF APPELLEE

ISSUES PRESENTED

I. Whether there was sufficient evidence that Armstrong engaged

in a scheme to defraud as alleged in the indictment.

II. Whether there was sufficient evidence that the funds

Armstrong transported had been fraudulently obtained.

III. Whether the court erred in refusing to admit as a

declaration against penal interest the declaration of an

accountant given during a bankruptcy adversary proceeding

against the defendant.

IV. Whether the court erred by failing to give a theory of

defense instruction.
V. Whether the district court's ex parte communications with

the jury were harmless error.

JURISDICTION

The district court had jurisdiction over this federal

criminal case pursuant to 18 U.S.C. § 3231. This Court has

jurisdiction pursuant to 28 U.S.C. § 1291. The district court

entered judgment and sentence on September 5, 1997. ER 24-30; CR

361. I The defendant filed timely notice of appeal on September

8, 1997. Fed. R. App. P. 4(b); ER 31; CR 362.

BAIL STATUS

Armstrong is currently at liberty, having signed a $250,000

personal recognizance bond.

STATEMENT OF PROCEEDINGS

On June 27, 1994, a federal grand jury sitting in San

Francisco, California, returned a twenty-one count indictment

charging defendant-appellant Connie Armstrong, Jr., aided and

abetted by co-defendant Richard A. Fowles, in counts one through

three with causing travel in interstate commerce to execute a

scheme to defraud in violation of 18 U.S.C. § 2314; in counts

_ As used in this brief: _ER" refers to tHe defendant's

Excerpts of Record; "CR" to the Clerk's Docket Sheet; "AOB to

Appellant's Opening Brief; and "RT" to the reporter's transcript.

four through fourteen and nineteen through twenty-one with wire

fraud in violation of § 1343; and in counts fifteen through

eighteen with interstate transportation of securities traceable

to fraudulently obtained funds in violation of 18 U.S.C. § 2314.

ER 1-23; CR I. The charges related to the Operation of Hamilton

Taft & Company, Inc. ("Hamilton Taft"), a payroll tax service

company headquartered in San Francisco, California. ER i-i0.

Jury trial commenced on December 3, 1996, and ran through

February 26, 1997. CR 239-318. On February 26, 1997, the jury

found Armstrong guilty on all twenty-one counts (CR 316) and

Fowles on counts two, four, five, nine, ten and fifteen. CR 315.

On August 29, 1997, the district court, the Honorable

Charles A. Legge, sentenced Armstrong to 108 months imprisonment,

to be followed by three years of supervised release, a penalty

assessment of $1,050, and to pay restitution of $62,750,000. ER

24-30, CR 360. 2

2 Fowles was sentenced to 30 months imprisonment and

ordered to pay restitution of $62,750,000. His appeal (docket
number 97-10513) raised the issues of the trial court's ex parte
communication with the jury and the submission of the transcript
of Dora Dunn's testimony to the jury without consulting with
counsel or providing cautionary instructions. Fowles' conviction
was affirmed on June 2, 1999; the opinion is attached as Addendum
i.
 STATEMENT OF FACTS

A. A_ Overview

Hamilton Taft was a service company that assisted large

companies by calculating, collecting, and paying their payroll

taxes to federal, state and local taxing entities. RT 513.

Hamilton Taft had been in existence for a number of years when it

was acquired in March of 1989 by Armstrong. RT 513-514. At its

height in 1990, Hamilton Taft annually processed $3-4 billion in

payroll taxes. RT 514. It derived its income from the

investment of client funds (employee and employer tax payments

collected for payment to taxing authorities) from the time of

receipt until the checks to the taxing agencies cleared. RT 515.

In March 1991, Hamilton Taft was forced into involuntary

bankruptcy by some of its clients; Fred S. Wyle was appointed

Hamilton Taft's trustee in bankruptcy. RT 509-510. Shortly

after his appointment Wyle determined that while Hamilton Taft

had collected $91 million from its clients to pay to various

taxing authorities, it had only $5.8 million on hand. RT 519.

With the help of accountants, Wyle discovered that over a

two year period Hamilton Taft had been preparing tax payment

checks but then _pulling" some of the checks (taking the

completed checks and holding them at Hamilton Taft rather than

4
depositing them) and not making timely payment to taxing

authorities. RT 520. Each quarter, more checks had to be pulled

to cover the shortfall and pay the penalties incurred when taxes

were not paid, so that by the last quarter of 1990, checks for

$57 million were withheld. RT 520. Each quarter, incoming funds

from some clients were used to pay the delinquent taxes of

others; Hamilton Taft was operating as a Ponzi scheme. 3 RT 524-

525. Wyle further determined that while there was a shortfall in

Hamilton Taft's accounts at the time of Armstrong's takeover, the

shortfall grew during Armstrong's ownership as a result of

operating losses and large penalty payments for late tax

payments. RT 526-529. Most of the shortfall, however, was

caused by the transfer of client funds from Hamilton Taft to

Armstrong's Texas companies (hereinafter collectively referred to

as "Dresdner") . RT 529. Funds transferred to Dresdner were used

to purchase assets for Armstrong including real estate and oil

wells, and to enhance Armstrong's lifestyle with the purchase of

a multi-million dollar ranch, a helicopter, luxury cars, and the

lease of an airplane. RT 532-548.

3 For the definition of a Ponzi scheme, see United States

v. Rasheed, 663 F.2d 843, 849 and fn. 1 (9th Cir.), cert. denied,
454 U.S. 1157 (1981).
 Accountant Lee Baly determined that during Armstrong's

ownership Hamilton Taft was not profitable and spent more than

$14 million of client funds to cover the cost of its operations.

RT 3330, 3362. Hamilton Taft paid more than $8.5 million in

penalties and interest to tax agencies for delinquent taxes and

had accrued (but unpaid) penalty obligations of $8 to $9 million.

RT 3363. More than $55.1 million was transferred from Hamilton

Taft to Armstrong and Dresdner. RT 3331. Hamilton Taft clients

lost more than $85 million including $30.4 million by Federal

Express and $10.4 million by Scott Paper. RT 3315-3321; Exs.

1941, 1945. More than $16.5 million was spent by or on behalf of

Armstrong personally including $9.2 million for his ranch,

political and charitable contributions of $965,000, $735,000 for

a criminal defense retainer, $1.7 million for a helicopter,

$352,000 for cars, $217,642 for a Fourth of July party, and

personal expenditures of $1.4 million including $98,392 for furs

for Christmas presents. RT 3343-3360; Exs. 1946-1948.

B. Armstrong's Operation Of Hamilton Taft

On January 1, 1989, Armstrong was a fireman in Texas with

$528 in the bank (RT 823, 3365); in his spare time he was using

Dresdner to acquire companies in financial distress. RT 3710,

3754, 3767-3768. At the time Dresdner was unable to pay its

6
 employees (RT 824, 4316), was delinquent on its employee payroll

taxes (RT 4974), had defaulted on loans (id.) and had negative

shareholder's equity of $511,000. RT 4778.

Early in 1989 Armstrong retained the Dallas law firm of

Godwin, Carlton & Maxwell ("GCM") to bring a shareholder's

derivative action on his behalf against the owner of Hamilton

Taft, Maxpharma. RT 1025-1029. The verified complaint alleged

that prior to its acquisition by Maxpharma, Hamilton Taft earned

its money by putting client funds in secure investments from the

time of receipt until tax payments were due, but that Hamilton

Taft was now in jeopardy of defaulting on its obligations because

Maxpharma had looted Hamilton Taft by loaning $14 million in

client funds to affiliated companies. RT 1031-1034; Ex. 161.

While its owners intended to declare Hamilton Taft bankrupt, they

settled the suit on March 29, 1989, by giving Hamilton Taft to

Armstrong. At that point, Hamilton Taft had a shortfall of $14

million. RT 1034-1043, 3291-3295.

In July 1989, Armstrong appointed Jim Paille Hamilton Taft's

corporate controller and Fowles its president. RT 1286-1287,

1298. Paille's department was responsible for the collection of

tax payments from clients; he wouldplace those funds into

liquid, overnight investment vehicles until the funds were needed

7
 to cover checks written for the payment of taxes. RT 1290-1293.

In July 1989, Armstrong ordered the transfer of $3 million

of client funds to Dresdner. He later claimed that Paille's

predecessor stole the money. RT 1294, 1298. Within days Paille

realized that because of the transfer Hamilton Taft lacked

sufficient funds to make tax payments for its clients. RT 1333-

1335. Several days later Paille was again short of funds; in

addition Armstrong said he would need $4-5 million transferred to

Dresdner for an investment. RT 1338. To make funds available

Armstrong came up with the idea of withholding tax payment

checks, and he told Paille to hold checks totaling approximately

$4.2 million. RT 1340. Armstrong told Paflle not to hold the

checks of clients who got _positive verification" (receipts

showing their tax deposit had been made) and to keep what they

had done a secret from clients and other Hamilton Taft employees.

RT 1340-1345, 1363.

In August 1989, Paille discovered that Hamilton Taft was $ii

million short of funds for tax payments, and Armstrong ordered

that another $7 million be transferred to Dresdner. RT 1349,

1358. At Armstrong's direction Paille and Fowles withheld tax

payment checks of more that $25 million. RT 1349-1356. Paille

participated in conferences with Armstrong and Fowles where they

8
discussed how long it would be until the IRS discovered and

disclosed that Hamilton Taft was not paying taxes. RT 1367-1375.

Armstrong told Paille not to discuss the withheld checks with

Hamilton Taft's auditors and was upset when the auditors

discovered some of the uncleared checks. RT 1390-1391. Paille

left Hamilton Taft shortly after he learned that client funds

would be transferred to Dallas for Armstrong's purchase of a

cattle ranch. RT 1393-1394.

Joseph Maitless became Hamilton Taft's vice president of

operations in April 1989, but first learned from Fowles and

Armstrong in October that client taxes had not been paid. RT

2253-2256. Maitless had been in the payroll tax business a

number of years and had never before heard of something like this

happening. RT 2257. Armstrong was concerned about when the IRS

would discover that payroll taxes had been withheld since that

would result in notification to Hamilton Taft's clients. RT

2258-2262. Armstrong suggested that Maitless try to get the IRS

to abate the penalties by telling them a "story." RT 2262.

Hamilton Taft prepared and filed tax returns for its clients at

the end of October reflecting full payment of taxes. These

returns were false because all of the taxes could not be not paid

because the funds taken by Armstrong were not returned tO

9
Hamilton Taft by the filing deadline. RT 739-747, 2263-2268. In

December 1989, Fowles asked Maitless to intervene with the IRS to

ask them to intercept delinquency notices before they went out to

Hamilton Taft's clients. RT 2273-2274. Armstrong authorized the

payment of delinquent taxes for some of Hamilton Taft's clients

to stop the IRS's issuance of delinquency notices and conceal the

non-payment of taxes (RT 2275-2282) and helped devise a strategy

to falsely tell the IRS and clients that any delinquencies were

caused by a banking problem. RT 2282-2284. Letters to that

effect were sent to Hamilton Taft clients. RT 2284-2286. In

January 1990, Hamilton Taft had to use $20 million of client

funds for current tax payments to pay delinquencies from prior

non-payments. RT 2301-2302. In a meeting with Maitless in

February of 1990 Armstrong said his attorneys told him he was in

trouble for the way he was using Hamilton Taft client funds. RT

2300-2301.

Stephen Lau began working for Hamilton Taft in September

1989 as a systems manager. RT 1792. In January 1990, after Lau

took over the position of cash manager, he became aware that tax

checks were being withheld (RT 1805-1806); it was necessary to

hold checks quarterly thereafter, and the amount went up each

quarter because of funds transferred out to Dresdner and

I0
penalties accruing on late taxes. RT 1824-1825. Armstrong

directed Lau to transfer $9.8 million to Dresdner February 1990,

an unknown amount in May 1990, $5.5 million in June 1990, $3.3

million in September 1990 and $16 million (net) in October 1990.

RT 1816, 1821, 1823, 1855, 1859, 1866-1867.

Christine Grambling was engaged to marry Armstrong in

January 1990 and was hired as Hamilton Taft's vice president of

marketing and client relations with responsibility for reviewing

bids made to clients and putting together literature to generate

sales. RT 3077, 3082, 3086. When she became president of

Hamilton Taft in September 1990 she first learned that client

funds were being withheld to finance the company, something that

was not being disclosed to clients. RT 3094-3095.

As funds were being transferred from Hamilton Taft Armstrong

hired Ed Briscoe as its sales manager and charged him with the

responsibility to bring in new clients. RT 1994-1996. Briscoe

reported weekly to Armstrong and kept him apprized of efforts to

recruit new clients. RT 2001, 2013. He trained his staff to

sell Hamilton Taft's services to prospective clients by

emphasizing that funds would be safely invested by Hamilton Taft

until timely payment to taxing authorities. RT 2006-2010.

Briscoe sought Hamilton Taft financial statements to share with

II
potential clients, but Armstrong refused saying it would be like

looking at his personal financial statement. RT 1998. Briscoe

was unaware of the financial problems at Hamilton Taft until its

bankruptcy (RT 1999); had he known that client funds were sent to

Dresdner for long term investments or used to purchase

Armstrong's ranch it would have had an adverse impact on the sale

of Hamilton Taft's services. RT 2020-2021, 2028.

One of Steve Lau's responsibilities was to send letters to

prospective clients of Hamilton Taft about how client funds were

used. RT 1840-1844. The letters, sent from March to August

1990, falsely stated that funds would only be used for tax

payments and did not disclose that checks were being withheld.

Id.; Exs. 572-575. Fowles told Lau to send the letters in order

to bring in new clients for Hamilton Taft and to keep cash

flowing into the company. RT 1845. In August 1990, Fowles

directed Lau to send other letters falsely stating that client

funds were only placed in short term investments. RT 1845-1849;

Exs. 576, 1135.

When Dora Dunn joined Hamilton Taft Fowles was president.

RT 2105-2106. In her sales representative training she learned

that Hamilton Taft put client funds in safe, overnight

investments and paid taxes when due. RT 2108-2117. Armstrong

12
told her that Hamilton Taft was in great financial shape and

would be making more aggressive investments withclient funds.

RT 2128-2132.

In late summer or early fall of 1990, Dunn learned from

Fowles that Hamilton Taft was holding checks because there was a

problem, no money. RT 2142-2143. Fowles told Dunn ". .we were

robbing Peter to pay Paul. That there was a hole in the company,

and that the R.R. Donnelley business [she brought in] would help

fill the hole." RT 2170. Though Dunn did not know it, R.R.

Donnelley checks were held back. RT 2146, 2171. Jim Beam was

another of Dunn's clients; their checks were also held. RT 2185.

Fowles told Dunn that Armstrong's ranch should be named "the

ranch that Hamilton Taft built" because it had been purchased

with company funds. RT 2190. Fowles thought Armstrong was "out

of control" and told Dunn "I've got to leave". RT 2194. Fowles

explained, however, that he could not leave because he did not

want to give up the money that he made. RT 2190.

Fred Holloway was hired by Hamilton Taft in February 1989 as

an account executive. RT 2508. From his training he learned

that Hamilton Taft invested client funds in government-backed,

secure, overnight investments. RT 2511. Hamilton Taft sales

materials and contracts provided to clients emphasized timely and

13
accurate deposit of tax payments before statutory deadlines. RT

2513, 2516, 2520, 2524. The contract with one of his clients,

Scott Paper, specifically limited Hamilton Taft's investments of

Scott funds to government securities. RT 2543-2544. Armstrong

approved execution of the contract with Scott. RT 3097-3098.

Armstrong instructed sales representative John Estes to tell

clients that their funds would be placed in treasury bills or

other overnight investments. RT 2735, 2740-2741. Estes brought

Commercial Credit to Hamilton Taft as a client. RT 2741.

Commercial Credit insisted on an addendum to the contract that

required that all funds remitted to Hamilton Taft be deposited in

an interest-bearing bank account opened by Hamilton Taft in

Commercial Credit's name. RT 2748-2749. Fowles authorized Estes

to agree to such an addendum to the contract, and signed the

addendum on behalf of Hamilton Taft. RT 2749, 2779. No such

separate account was ever opened. RT 3184.

Hamilton Taft's other sales representatives also told their

clients that Hamilton Taft would hold client funds in secure,

liquid investments (Dunn RT 2110-2112; Boone Armstrong RT 3897,

3907-3908), would earn its income from holding tax funds from the

time of collection until tax payments were made (Dunn RT 2138,

2178; Boone Armstrong RT 3898) and would pay taxes on time (Dunn

14
RT 2120, 2136, 2177; Boone Armstrong RT 3877).

During Armstrong's ownership Hamilton Taft recruited a

number of new clients. All entered into agreements because they

believed that Hamilton Taft would invest their funds in safe,

short term instruments and pay their taxes when due. RT 2373-

2382 [R.R. Donnelley], 2477-2483 [Jim Beam Brands], -2584-2585 and

2631-2635 [Scott Paper], 2648-2651 [Advo Systems], 2693-2699

[Kendall], 2797-2801 [Commercial Credit], 2819-2823 [Federal

Express]. Whenever any of the companies checked with Hamilton

Taft they were assured that all of their payments had been timely

made. RT 2387, 2484-2485, 2704-2706, 2833-2834.

As the money flowed out of Hamilton Taft things changed at

Dresdner and in Armstrong's personal life. Dresdner moved to

"magnificent" offices, lavishly furnished, at Turtle Creek in

Dallas and the staff grew to more than 40 employees (RT 834-835)

with annual salaries and overhead of more than $2 million. RT

889. With money obtained from Hamilton Taft Armstrong invested

in a series of money losing ventures such as strip shopping

centers, an excavating company, and a restaurant. RT 848-851,

861-863, 883-888, 2948-2951. Armstrong made several investments

contrary to the advice of his advisors, such as the purchase of

an interest in his brother's company, Coffea. RT 851-852, 2984-

15
2985, 3114. Armstrong purchased two oil fields using

approximately $2 million transferred from Hamilton Taft in May of

1990 and ultimately did risky, wildcat oil drilling contrary to

recommendations from his advisors. RT 875-879.

In his own name Armstrong purchased three boxes at Texas

Stadium (RT 872-873, 3532-3533); two Jaguars and a Rolls Royce

(RT 2919); gave his fiance $42,000, a wardrobe, a three-quarter

length sable coat and a diamond engagement ring, pendant, and

earrings (RT 2906-2912); and took girlfriends, fiances and

friends on trips on chartered planes to Carribean islands,

Europe, and other locations. RT 2913-2914, 3111, 3526, 3548. He

maintained a suite at the Mark Hopkins Hotel for $120,000 per

year (RT 2969,4500, 4978) and had chauffeured limousines at the

ready in San Francisco and Dallas. RT 3534-3535. He made three

successive $I00,000 down payments on a condominium in Aspen, then

forfeited his deposit without closing the transaction (but kept

the $35,000 furniture purchased for the condominium). RT 4977-

4978.

Armstrong purchased his ranch for $6.5 million in February

of 1990. Dresdner executives advised against the purchase (RT

856, 933, 4885-4887), but " . he was like a-kid with a new toy

.... " RT 3080. Armstrong subsequently added a show arena to

16
 the ranch at a cost of $i million. RT 3345,3551. He held a

Fourth of July barbeque for 500 with entertainment by George

Strait, and had a New Year's Eve party with Garth Brooks. RT

859-860, 2922, 3540-3541. Armstrong claimed he had an

opportunity to resell the ranch at a profit but never did so. RT

869, 4901-4903. He assured advisors either that he had used his

own money to buy the ranch or that it was a personal matter not

involving Hamilton Taft. RT 868 [Hargis], 1226 [Rosen: "Don't

worry. Hamilton Taft funds weren't used."], 5386 [Christie:

Armstrong _used his own money to buy the ranch .... "] .

At varying times Armstrong's advisors told him that he was

spending excessively and that his lifestyle was inappropriate (RT

2955, 3012), but Armstrong felt he was "entitled" to the

lifestyle he was leading. RT 4483, 5078. His advisors also

suggested cutting salaries and staffing; Armstrong refused to do

either. RT 866, 883-890, 2954, 3009-3011, 4476-4477, 4915-4921.

By January of 1991 the cloud over Hamilton Taft and Dresdner

was darkening. Barry Morgan, Dresdner's chief financial officer,

met with Armstrong regularly and provided him with financial

statements that documented the company's economic deterioration.

RT 2946, 2956-2957, 2962, 2966-3005. The Dresdner financial

statement for the month ending October 31, 1990, showed a

17
negative shareholder's equity of $11.8 million and a loss of $9

million in 16 months. RT 3006. At the end of 1990 Dresdner owed

Hamilton Taft $68 million (which itself had experienced a loss of

$17.5 million for the year). RT 3015.

A change in the tax law scheduled to go into effect the

second quarter of 1991 would mean rapidly escalating penalties on

late payments. RT 763, 3776, 4145-4146. For the $27 million in

Federal Express tax payments withheld in the first quarter of

1991 the penalty under the old law was $1.3 million, while under

the new law it would be $7.8 million. RT 764-770.

In January 1991 Armstrong summoned Dresdner's president,

Mike Hargis (RT 839), and controller, Morgan (RT 2952), to a

meeting at Hamilton Taft; he wanted them to decide which clients

would have their tax payments withheld (being careful not to take

funds from those who had recently complained, had their checks

held recently, or who had recently received penalty notices). RT

891-892, 3020-3021. When those in the meeting expressed concern,

Armstrong said if there were problems he would liquidate his

personal fortune to pay the taxes. RT 3022. Morgan knew that

Armstrong was being dishonest because all of his assets had been

obtained from Hamilton Taft and were insufficient to pay the

delinquent taxes. RT 3022-3023. Morgan resigned as did Hargis

18
 (who learned for the first time that client taxes were being

withheld). RT 891, 894, 3023.

Although Armstrong had issued bonds back to Hamilton Taft

for the money he borrowed, the collateral was inadequate. The

$30 million bond for the oil wells was secured by one oil tract

purchased for $i million, and there was not even enough income to

pay the interest on the bond. RT 3004, 4040-4041. A second bond

for $15 million was collateralized with real estate parcels

purchased for less than $i million. RT 4041-4042. And the ranch

and its cattle served as collateral for another $23.8 million of

obligations. RT 4943-4948 5239-5243.

With disaster pending Armstrong purchased a helicopter for

$1.4 million (RT 4960-4962 to shuttle him and his guests to the

heliport at the ranch (RT 4967, 5419-5432) ; leased a 19 passenger

Gulfstream G-4 at a cost of more than $1.38 million for six

months for which he sought a stewardess/traveling assistant (RT

4967-4971) ; paid $735,000 for a criminal defense retainer (RT

4197) ; and explored expanding the 13,000 square foot main house

at the ranch to add a larger master bedroom. RT 4908-4912.

In March of 1991 Hamilton Taft controller Steve Solodoff

discovered what was happening to client funds and held a meeting

to tell clients that Armstrong had embezzled $I00 million from

19
Hamilton Taft, that new tax funds were being used to pay old tax

obligations, and that Armstrong was running a Ponzi scheme. RT

4075-4085. Armstrong responded by sending a letter to all

Hamilton Taft clients (RT 3197-3200) informing them that all of

Solodoff's charges were false. RT 2461-2466. Within days there

was a "run on the bank," Hamilton Taft was sued, and Wyle was

appointed trustee. RT 3196-3197.

C. The Information Armstrong Withheld From His Victims

When Armstrong took over Hamilton Taft his attorneys at GCM

advised him: that client funds could only be used for short

term, safe investments; that taxes had to be paid when due; that

he could not misrepresent to clients how Hamilton Taft used their

funds; that he should disclose the deficit in Hamilton Taft to

its clients; that he should not loan Hamilton Taft funds to

others; and that he faced civil and criminal liability if he

caused taxes not to be paid. RT 1049-1055, 1064-1069, 1149,

1171-1181, 3666, 4790, 4827. At the time of his takeover

Armstrong also saw a legal opinion prepared by Pettit & Martin

for Hamilton Taft's prior owners which said that client funds

should be invested in highly liquid, short term investments;

failure to invest with reasonable prudence could result in claims

of breach of fiduciary duty; and risky investments could be

2O
subject to claims of fraud. RT 4782-4785.

Armstrong intentionally withheld from GCM (as well as his

accountants) the fact that Hamilton Taft was holding checks and

not paying taxes on time, and he did not ask GCM about the

legality of holding checks. RT 1144, 1206, 4792-4796, 4834. GCM

first learned that Armstrong was transferring funds from Hamilton

Taft to Dresdner in January of 1990 when Armstrong was sued by a

former in-house counsel, Bob Bruner, who alleged that Armstrong's

companies were not profitable and were supported by funds

transferred from Hamilton Taft. RT 1210-1220. Armstrong denied

that this was happening (RT 1220, 4800-4804) and at about the

same time terminated his relationship with GCM. RT 1227.

After Bruner left Dresdner, Armstrong hired William Patrigo

as his in-house counsel. RT 4810. Patrigo advised Armstrong

that Hamilton Taft's contracts with its clients created a trust

that limited how Hamilton Taft could invest client funds (RT

4836-4839) and that clients never expected unfettered use of

their funds. RT 4846. Patrigo said that Hamilton Taft could not

loan funds to affiliated companies and that improper use of

client funds could result in criminal charges. RT 4840-4842.

Patrigo was not aware that tax payments were being withheld at

Hamilton Taft. RT 4847-4848. When he learned that Armstrong

21
 intended to withhold future payments he advised Armstrong not to

do so, but to liquidate assets and make the tax payments. I_dd.

Armstrong did not take that advice (RT 4849), and Patrigo

resigned from the board of Dresdner because Armstrong appeared

interested only in selective legal advice. RT 4832-4833.

From July 1989 forward Armstrong knew Hamilton Taft would

not be able to make the tax payments for all of its clients when

the payments were due and that it would be forced to hold checks.

RT 4752, 4985. He was not concerned about what his sales staff

told clients because all funds initially went into a short term

investment account, and most of those funds were not used for

obligations other than taxes. RT 4524-4526. He did not tell his

sales staff about his use of client tax funds for personal

investments or that current payments from some client were being

applied to overdue tax obligations of other clients. RT 4743.

Even when checks were intentionally held back, letters to clients

blamed the non-payment on a mistake. RT 4856-4858. Armstrong

was afraid that if word got out about what was happening with tax

payment checks Hamilton Taft would lose existing clients and be

unable to recruit new ones. RT 4755, 4813, 4819.

SUMMARY OF ARGUMENT

The government presented sufficient evidence that Armstrong

22
 intended to defraud Hamilton Taft's clients. The government

proved that Armstrong induced Hamilton Taft clients to make

payments to Hamilton Taft by falsely promising to pay taxes on

time, and then used the tax funds obtained for personal expenses

or to pay the delinquent taxes of others.

The government presented sufficient evidence that Armstrong

caused the interstate transportation of securities traceable to

funds wrongfully converted and taken by fraud. The government

proved that Armstrong fraudulently induced client to pay funds to

Hamilton Taft and then caused those funds to be placed in

interstate commerce.

The court properly excluded the sworn Statement of Keith

Voigts offered by Armstrong because it was not a declaration

against penal interest under Rule 804(b) (3), Federal Rules of

Evidence.

The court properly refused to give Armstrong's theory of

defense instruction. The instruction was not legally correct and

did not accurately state Armstrong's defense. The instructions

given presented Armstrong's good faith defense.

Armstrong cannot argue that the trial court's ex-parte

contact with the jury was erroneous because th_s Court found any

error harmless in the appeal of the co-defendant, Fowles. In any

23
event, any error was harmless beyond a reasonable doubt.

ARGUMENT

I. THE EVIDENCE WAS SUFFICIENT TO SUPPORT ARMSTRONG'S

CONVICTIONS

A. Standard of Review

Evidence is sufficient to support a conviction if, reviewing

the evidence in the light most favorable to the prosecution, any

rational trier of fact could have found the essential elements of

the crime beyond a reasonable doubt. United States v. Hernandez,

105 F.3d 1330, 1332 (9th Cir.), cert. denied, 118 S. Ct. 227

(1997); United States v. Contreras, 63 F.3d 852, 857 (9th Cir.

1995) (citing Jackson v. Virqinia, 443 U.S. 307 1979)). _The

reviewing court must respect the exclusive provlnce of the fact

finder to determine the credibility of witnesses, resolve

evidentiary conflicts, and draw reasonable inferences from proven

facts." United States v. Hubbard, 96 F.3d 1223, 1226 (9th Cir.

1996) citing United States v. Goode, 814 F.2d 1353, 1355 (9th

Cir. 1987).

B. The Government Established Beyond A Reasonable Doubt

That Armstrong Engaged In A Scheme To Defraud

Armstrong contends that the government failed to prove that

the victims in this case were defrauded. AOB 21. He reaches

this conclusion by cobbling together disparate facts to his

24
liking while ignoring those pointing to his guilt, thereby

ignoring the appropriate standard of review.

i. Armstrong improperly diverted funds from Hamilton

Taft

Armstrong claims, based on "facts" adduced at trial, that

there was n__ooproof that client funds were diverted Armstrong

contends that Hamilton Taft's use of client funds was not

restricted and thus he could use them however he wished. AOB 23-

24. To the contrary, he was told by his attorneys at GCM that

client funds could only be used for short term, safe investments

and that taxes had to be paid when due (RT 1049-1056, 1065, 1149,

1171-1181, 3666, 4827); he had the Pettit & Martin legal opinion

which said that client funds should be invested in highly liquid,

short term investments, that failure to invest with reasonable

prudence could result in claims of breach of fiduciary duty, and

risky investments could be subject to claims of fraud (RT 4782-

4785); and his in-house counsel, Patrigo, advised him that

Hamilton Taft's contracts with its clients created a trust that

limited how Hamilton Taft could invest client funds (RT 4836-

4839) and that clients never expected unfettered use of their

funds. RT 4846.

The contracts themselves did not allow long term

25
investments, but stated that Hamilton Taft would make the

payments when due (see, e._., RT 2378-2386, 2477-2482, 2584-2592,

2649-2650, 2693-2697); the clients expected that the funds would

be used by Hamilton Taft only from the time they were remitted

until the taxes were due (RT 2379-2382, 2483, 2632, 2699); and

the clients advanced only enough money to make current payments

(see, e.____q_.,RT 2697-2699, 2798, 2834), which meant there was no

money available for lonq term investments.

Armstrong blames the cancellation of an overdraft account at

the Bank of Chicago for his problems (AOB 24-25), yet before that

happened Armstrong had begun transferring funds out of Hamilton

Taft. RT 1294-1297, 1333-1335. Once Armstrong realized Hamilton

Taft lacked sufficient funds to pay taxes he made a conscious

decision to conceal the problem and withhold taxes rather than

disclose the problem. RT 1336-1341. While Armstrong contends he

chose to make long terms investments to _fill the hole" (AOB 25),

his actual use of funds undermines this contention and the jury

rejected his story.

Finally, Armstrong contends there is no evidence he diverted

funds. AOB 25. Armstrong's salary from all sources was $459,000

(RT 3362); he spent $8.4 million for personal expenses (RT 3350-

3361) including $445,000 lust for cars, jewelry and furs. RT

26
3354, 3359. Armstrong spent Hamilton Taft into oblivion despite

the warnings of his attorneys, accountants and advisors; though

aware of Hamilton Taft's deteriorating financial condition and

the change in the tax law that would end his ability to "roll"

checks, he responded by spending even more irresponsibly for his

personal benefit. Armstrong clearly diverted Hamilton Taft

client funds to his own benefit.

2. Armstrong fraudulently induced clients to contract

with Hamilton Taft

Armstrong again has difficulty separating fact from fiction

when he claims that he did not fraudulently induce anyone to

contract with Hamilton Taft. He is reduced to arguing that when

Hamilton Taft promised it would pay taxes on tim_e, he really

meant he would pay the taxes some time. AOB 27-28. Yet, the

contracts stated that Hamilton Taft would make the payments when

due (RT 2378-2386, 2477-2482, 2584-2592, 2649-2650, 2693-2697),

and the clients expected that the funds would be used by Hamilton

Taft only from the time they were remitted until the taxes were

due. RT 2379-2382, 2483, 2632, 2699. They would not have

contracted with Hamilton Taft had it not agreed to pay taxes when

due. RT 2376-2378, 2590-2591, 2396-2397.

Armstrong argues he was not aware that clients were being

27
 told payment would be made when due. A0B 29-30. In that he

received weekly status reports from each of Hamilton Taft's

managers and copies of contracts and documents, that contention

is not credible and the jury rejected it. Moreover, Armstrong

knew from July 1989 forward that Hamilton Taft would not be able

to make the tax payments for all of its clients and that it would

be forced to hold checks (RT 4752, 4985), but he was not

concerned about what his sales staff told clients. RT 4524-4526.

There was also direct evidence that Armstrong misled clients:

Armstrong authorized Hamilton Taft to enter into a contract with

Scott Paper that would not allow their funds to be commingled or

withheld (RT 3097-3098); the funds were commingled. RT 2387-

2391. Hamilton Taft entered into a contract with Commercial

Credit which required segregated accounts (RT 2797-2810); no

segregated accounts were created. RT 3317-3318, 4868. Armstrong

was certainly aware of the promises made to these clients and

intentionally disregarded them. Clearly clients were knowingly,

fraudulently induced to contract with Hamilton Taft.

3. Armstrong engaged in a cover-up

Finally Armstrong claims that there was no cover-up, that he

28
"did nothing to conceal any wrongdoing." AOB 31. 4 To the

contrary, Armstrong concealed what he was doing at every step.

He concealed the withheld checks from employees, he proposed to

tell a "story" to the IRS, and he fired and threatened those who

would not do his bidding; Armstrong did not want to disclose what

was happening to avoid losing customers.

The Solodoff incident is instructive. Solodoff discovered

what was happening to client funds and held a meeting to tell

clients that Armstrong had embezzled $i00 million from Hamilton

Taft, that new tax funds were being used to pay old tax

obligations, and that Armstrong was running a Ponzi scheme. RT

4075-4085. Armstrong responded with a letter saying that

"[w]ithout exception, all such charges made by this former

employee are false." ER 58, emphasis added. As the testimony of

Wyle and Baly revealed, Solodoff's claims were remarkably

accurate. The only one covering up was Armstrong.

Intent to defraud is proven by showing the existence of a

scheme that was "reasonably calculated to deceive persons of

ordinary prudence and comprehension." United States v. Bohonus,

4 Armstrong claims that clients receivednotice that

inaccurate returns had been filed (AOB 31); they were only
notified that tax payments were delinquent. RT 706-720.

29
628 F.2d i167, 1172 (9th Cir. , cert. denied, 447 U.S. 928

(1980). Intent can be determined from examining the scheme

itself (United States v. Green, 745 F.2d 1205, 1207 (9th Cir.

1984), cert. denied, 474 U.S. 925 (1985)) and can be inferred

from statements and conduct. United States v. Beecroft, 608 F.2d

753, 757 (9th Cir. 1979).

Here Armstrong was _living champagne wishes and caviar

dreams" with his ranch, fancy cars, airplane and helicopter, all

the while siphoning client tax money from an unprofitable

Hamilton Taft, lying to clients, and committing the very looting

of which he complained when he sued to acquire Hamilton Taft.

Viewed in the light most favorable to the conviction, the

government proved Armstrong's intent to defraud beyond a

reasonable doubt.

C. The Government Established Beyond A Reasonable Doubt

That Armstrong Transported Stolen Property In
Interstate Commerce

Counts 15 to 18 allege that Armstrong caused the

transportation of securities in interstate commerce knowing that

the securities were traceable to funds that were wrongfully

converted and taken by fraud. ER 19-21. The securities in

question were checks sent to North Carolina to replace tax

payment checks that had been previously withheld; in other words

3O
the securities were the so called "replacement checks." It was

the government's theory that Armstrong fraudulently induced the

victims to make tax payments to Hamilton Taft and then used those

funds to pay other clients' delinquent taxes. RT 3426-3427.

Armstrong contends that the government's failed to prove this.

AOB 38.

Armstrong induced new clients to do business with Hamilton

Taft (ER 6-7),but his scheme was broader and included concealing

the fact that taxes were held back to continue the flow of funds

into Hamilton Taft (ER 8), and to delay discovery of what was

happening to tax funds. ER 9. He accomplished this in part by

paying past due taxes of some clients _with funds received from

other clients whose own taxes were about to be due" (ER 9), the

"payment of late taxes with funds received for currently due

taxes." ER 19.

[Question by Mr. Smetana] If client A tax obligation for

January 15th, 1997 was being paid on April 30th 1997, what
monies were being used to pay client A's tax obligations?

[Answer by Mr. Baly] Client A's, the check issued for

client A's taxes would have been held, so that coming

into April there have to be new money withheld from another
client in order to make good the payment now being made for
client A.

RT 3304. Payment for previously held checks was accomplished

with "replacement checks" (RT 3304-3314; Exs. 1366-1369, 1942,

31
 1943), which were transported in interstate commerce. RT 3392-

3393.

Each client made payments to Hamilton Taft in an amount

sufficient to pay only current tax obligation (RT 2379-2382,

2483, 2632, 2697-2699, 2798, 2834), so there was no extra money.

It follows that all of the funds taken for replacement checks had

to be stolen from other clients and that all of the funds moving

in interstate commerce were stolen.

In United States v. Poole, 557 F.2d 531 (5th Cir. 1977), and

United States v. Heath, 970 F.2d 1397 (5th Cir. 1992) cert.

denied, 507 U.S. 1004 (1993), relied upon by Armstrong (at AOB

40), the government's proof was insufficient because it failed to

show that the money moving in interstate commerce consisted of

funds that were not legitimately obtained. That was not the case

here. From July of 1989 Armstrong knew that Hamilton Taft lacked

funds to pay its clients' taxes (even though those clients had

given Hamilton Taft sufficient funds to pay the taxes in full)

and knew he was obligated to disclose this to his clients. He

knew he had to use their funds to pay taxes and could not

transfer them to Dresdner or elsewhere. Nevertheless Armstrong

fraudulently concealed his diversions in order to keep money

flowing into Hamilton Taft; all of funds that flowed into

32
Hamilton Taft from clients from July of 1989 were the result of

fraud even though some funds went to their intended purpose. All

o_ the money that moved in interstate commerce as replacement

checks was stolen. The government met its burden of proof.

III. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION BY REFUSING
TOADMIT INTO EVIDENCE A HEARSAY DECLARATION THAT DID NOT
MEET THE REQUIREMENTS OF FEDERAL RULE OF EVIDENCE 804(b) (3)

Armstrong argues that the district court erred by denying

his motion to admit into evidence a hearsay declaration signed by

Keith Voigts ("Voigts"), a partner with the accounting firm of

KPMG Peat Marwick ("Peat Marwick"). Armstrong claims that the

declaration should have been admitted under Rule 804(b) (3),

Federal Rules of Evidence, as a "declaration against interest."

He further claims the error was not harmless.

The district court correctly concluded, however, that the

declaration did not constitute a statement "against interest" of

the declarant when made. The district court also correctly

concluded that there were insufficient corroborating

circumstances clearly indicating the trustworthiness of the

declaration. Hence, the declaration was not admissible as an

exception to the hearsay rule.

Further, even if error is assumed, it washarmless because

the evidence of Armstrong's guilt was overwhelming, and the

33
 suggestion that he relied in good faith on the advice of others

was clearly rejected by the jury.

A. Standard of Review

District courts are granted broad discretion in admitting

evidence, and their rulings are reviewed only for an abuse of

discretion. United States v. Ortland, 109 F.3d 539, 543 (9th

Cir.), cert. denied, 118 S. Ct. 141 (1997); United States v.

Collicott, 92 F.3d 973, 978 (gth Cir. 1996). If error is of

constitutional magnitude, it can be disregarded only if it is

harmless beyond a reasonable doubt. Delaware v. Van Arsdall, 475

U.S. 673, 681 (1986); United v. Garibay, 143 F.3d 534, 539 (gth

Cir. 1998). If error is not of constitutional magnitude, the

government must show only that the prejudice resulting from the

error was more Probably than not harmless. United States v.

Morales, 108 F.3d 1031, 1040 (9th Cir. 1997) (en banc) .

B. Discussion

When Armstrong took over Hamilton Taft, he retained the

services of Peat Marwick to perform an acquisition audit under

the supervision of Voigts, a partner in the firm. ER 71.

Thereafter, Peat Marwick performed one other formal accounting

function, a balance sheet review in June of 1989. RT 4808. In

late 1989, while preparing to perform a year-end audit, an

34
employee of Peat Marwick discovered payroll tax checks had been

withheld from deposit. RT 4809. As a result, Peat Marwick was

pulled out of that specific engagement and never performed

additional audit or review work for Hamilton Taft. RT 4809.

Voigts, however, continued to be among Armstrong's advisors

until the collapse of Hamilton Taft. ER 72-73. Following

Hamilton Taft's demise, Wyle, its trustee in bankruptcy, sued

Armstrong and others. RT 655-657. In connection with that

litigation, Voigts signed an ll-page declaration (ER 70-80) in

which he, among many other things, generally described the

services he provided Armstrong (ER 72) and his perceptions of

Armstrong's motivation (ER 74); opined on Armstrong's integrity

(ER 75); denied having advised Armstrong his activities were

"inappropriate" (ER 76); and generally denied any involvement in,

or knowledge of, illegal (or otherwise inappropriate) behavior.

ER 76, 80.

Because Voigts was unavailable 5 to testify at the trial,

Armstrong sought to introduce the declaration under the hearsay

exception found in Rule 804(b) (3), Federal Rules of Evidence.

5 Through counsel, Voigts advised the parties and the

district court, that he would assert his FifthAmendment

privilege against self incrimination if called to testify. RT

1319.

35
That Rule reads:

(b) Hearsay exceptions. The following are not excluded by

the hearsay rule if the declarant is unavailable as a
witness:

(3) Statement against interest. A statement which was

at the time of its making so far contrary to the
declarant's pecuniary or proprietary interest, or so
far tended to subject the declarant to civil or
criminal liability, or to render invalid a claim by the
declarant against another, that a reasonable person in
the declarant's position would not have made the
statement unless believing it to be true. A statement
tending to expose the declarant to criminal liability
and offered to exculpate the accused is not admissible
unless corroborating circumstances clearly indicate the
trustworthiness of the statement.

The district court found the hearsay exception to be

inapplicable after listening to extensive argument on the point

(RT 1317), and after listening to almost all of the trial

testimony. RT 5093. The district court said:

I read the declaration and I cannot see how this is against

Mr. Voigts' interest. In fact, quite the contrary. It - it
seems to me that in all respects a self-serving declaration.
It was fully defensive and fully supportive with what Mr.
Voigts did. It's obviously an attempt to justify everything
that both Mr. Armstrong and Mr. Voigts did and it doesn't
admit that anything was wrong.

There's no admission. There's no consequence to the

statement. It doesn't subject Mr. Voigts to any criminal or
civil liability and, in fact, indeed it just does exactly
the opposite, that is, it attempts to avoid inference of

civil or criminal liability. And I think certainly a

reasonable person signing this declaration at this time
would have made this statements [sic].

36
 Also, looking at the setting, it's a lengthy narrative, ii,
12 pages, no corrections made, which Mr. Voigts just signs
the declaration. As I understand, it was prepared by Mr.
Armstrong's attorneys. I believe that's clear on the record
and indeed clear on the face of the declaration itself and

was being used for purposes of representing Mr. Armstrong in

the civil suit.

AS far as other indications of reliability or non-

reliability, it's been indicated that statements were
contradicted or altered in the deposition which he
later gave inwhich the setting, of course, changed and
I think substantially impeached by the fact of the
large later settlement by Mr. Voigts and Peat Marwick.
So I - I certainly don't think it [fits] the
declaration against interest.

RT 5091-5092. The district court correctly rejected Voigts'

statement.

To obtain admission of a statement against penal interest

under Rule 804(b)(3), the proponent must show that (i) the

declarant is unavailable as a witness, 2) the statement so far

tended to subject the declarant to criminal liability that a

reasonable person in the declarant's position would not have made

the statement unless he believed it to be true, and (3)

corroborating circumstances clearly indicate the trustworthiness

of the statement. United States v. Paquio, 114 F.3d 928, 932

(9th Cir. 1997). The Government conceded below that Voigts was

unavailable, hence the first criteria was met. However,

Armstrong did not meet either the second or third criteria.

37
 As the district court found, the declaration is simply not a

statement made by someone who reasonably knew at the time he made

it that it would subject him to criminal liability. The

declaration was signed in October 1992, in connection with

pending civil litigation in which Voigts was not a defendant, and

about two years before any criminal charges were brought. ER i.

More importantly, there is absolutely nothing in the declaration

that a reasonable person would know would get him in trouble, or

otherwise result in some negative consequence.

Armstrong argues, nevertheless, that because Voigts

acknowledged being involved with conduct that eventually resulted

in Armstrong's indictment, he must have made those statements

recognizing that they were against his penal interest.

Armstrong's argument misses the point of the exception to the

hearsay rule. A statement against penal interest is admissible

because it is generally assumed that persons do not make

statements which are damaging to themselves unless satisfied for

good reason that they are true. See Advisory Committee Notes,

Rule 804(b) (3) . Voigts did not make any "damaging" statements in

his declaration. He merely defended his conduct, and Armstrong's

conduct, as being proper and legal. It is self-serving hearsay,

perhaps the least reliable form of hearsay. Armstrong clearly

38
did not meet the second criteria for the admissibility of

declarations against interest.

Armstrong also failed to meet the third criteria. He failed

to demonstrate that the corroborating circumstances clearly

indicate the trustworthiness of the statement. As the district

court found, the self-serving declaration was prepared by

Armstrong's attorneys for use in civil litigation, and "was sort

of stuck under [Voigts'] nose to sign." RT 1312. Further, it

was contradicted by Voigts in a later deposition given in

litigation where he was a defendant. RT 5092. The

circumstances, rather than "clearly" indicating the

trustworthiness of the statement, point in the opposite

direction.

Armstrong argues the alleged error in failing to admit the

Voigts declaration was not harmless, and suggests that the

appropriate standard is "harmless beyond a reasonable doubt."

AOB 49.

In United States v. Slau@hter, 891 F.2d 691, 698 (9th Cir.

1989), relied on by Armstrong, this Court concluded it was error

for the district court to exclude an out of court statement

offered under Rule 804(b) (3). In discussing the applicable

harmless error standard, this Court said: "Based on our review

39
 of the record, it is more probable than not that it affected the

verdict." Id. This is the non-constitutional standard. Later,

in United States v. Pa_uio, 114 F.3d at 934, this Court did not

reach the question of the applicable standard of harmless error

review, stating, "We do not intimate that the exclusion of part

of the statement violated appellants' constitutional rights in

this case .... " It would seem, therefore, that this Court

need only conclude that it is more probable than not that the

failure to permit admission of Voigts' declaration did not affect

the verdict to find harmless error.

Under either standard, however, the guilty verdicts on all

counts in this case could not have been affected by admission of

this self-serving declaration. First, the evidence against

Armstrong was overwhelming (see government's brief pp. 4-23).

Second, Armstrong was able to call as witnesses numerous

attorneys and other business advisors he claimed to rely on while

using the Hamilton Taft client funds as his private treasury. 6

Third, Armstrong was able to get before the jury Voigts'

involvement in the marketing plan and business strategy Armstrong

6 David Everett (RT 3593-3605) and James Eppright (RT

3744-3908) testified. Armstrong could have called (but did not)
Bruner, Patrigo, Flinchum, O'Brien and Christie. See RT 4397-
4400.

4O
 claimed to be pursuing in good faith. See, for example, RT 4408

[accountants and attorneys knew Armstrong was making these

investments]; RT 4427 [Peat Marwick valued the shopping centers];

RT 4536 [Armstrong discussed with Voigts his failure to disclose

financial statements and size of deficit] ; RT 4538 [Armstrong

discussed marketing plan with lawyers and accountants]; RT 4661

[Voigts was on Armstrong's advisory board of directors]; RT 4726

[Rosen and Voigts were on the advisory board so they could watch

over what Armstrong was doing]; RT 4728 [Voigts suggested an

acquisition]. The jury simply did not believe Armstrong, the

fireman from Allen, Texas, was operating in good faith, when he

used Hamilton Taft client funds for his own purposes, spiraling

the company into disaster as any Ponzi scheme will do.

For all these reasons, the district court correctly refused

to admit Voigts' declaration as an exception to the hearsay rule.

If error is assumed arquendo, the error was harmless.

IV. THE DISTRICT COURT APPROPRIATELY REJECTED ARMSTRONG'S

PROPOSED "THEORY OF THE DEFENSE" INSTRUCTION

At the start of the jury trial, and again at its conclusion,

Armstrong urged the district court to instruct the jury, in

essence, that the payroll taxes collected by Hamilton Taft from

its clients were funds that could be used by Hamilton Taft for

41
virtually any period of time, and for any purpose, as long as

when the funds were eventually paid to the IRS, Hamilton Taft

also paid any resulting penalties and interest. Armstrong argues

that this was his "theory of the defense," and that this theory

is supported by the reasoning found in In re Hamilton Taft, 53

F.3d 285 (9th Cir. 1995), vacated as moot, In re Hamilton Taft,

68 F.3d 337 (9th Cir. 1995).

Armstrong's proposed instruction was properly rejected, v It

is not supported by law. Moreover, it is contrary to the express

terms of the contracts between Hamilton Taft and most of the

victim-clients, and the representations made to those victim-

clients by Armstrong's sales force and other executives.

A. Standard Of Review

The standard of review of a district court's denial of a

Armstrong's proposed jury instruction stated:

With respect to the funds paid to Hamilton Taft by the

client companies, with the exception of two clients who

arranged to have their payments kept in separate accounts,

the funds paid to Hamilton Taft became the property of
Hamilton Taft and could be commingled by Hamilton Taft,
treated by Hamilton Taft as its own assets, used to pay
Hamilton Taftis operating expenses, and invested by Hamilton
Taft for its own benefit. Hamilton Taft did not hold the

funds in trust as your employer might hold your withholding

taxes. In other words, Hamilton Taft was entitled to the

use of the funds until the taxes were due to be paid,

pursuant to the terms of the contract. ER 169.

42
 proposed jury instruction turns on the nature of the error

alleged. United States v. Knapp, 120 F.3d 928, 930 (9th Cir.),

cert. denied, 118 S. Ct. 417 (1997). This Court reviews de novo

whether the district court's instructions adequately presented

the defendant's theory of the case. Id. The form in which the

district court has expressed the defendant's theory of the case

is reviewed for abuse of discretion. United States v. Sarno, 73

F.3d 1470, 1485 (9th Cir. 1995), cert. denied, 518 U.S. 1020

(1996). The district court's determination of the factual basis

for a requested instruction is evaluated under an abuse of

discretion standard. Id.

B. Discussion

A defendant is entitled to have a court instruct a jury on

his theory of defense if the instruction is supported by law and

has some foundation in the evidence. United States v. Warren, 25

F.3d 890, 895 (9th Cir. 1994). Armstrong was not entitled to his

proposed instruction because it was supported neither by law nor

by pertinent evidence.

Armstrong places reliance on In re Hamilton Taft, supra, to

provide the necessary legal support for his proposed instruction.

As the district court concluded below, that reliance is

misplaced. Although that case involves the same Hamilton Taft

43
that Armstrong collapsed into bankruptcy through his illegal

diversions of money, and a typical victim-client of the scheme (S

& S Credit Company), this Court was analyzing a very different

legal concept.

The central issue in the criminal case was whether Armstrong

improperly diverted tax moneys for his own purposes, such as

buying himself a $9 million ranch in Texas; throwing lavish

parties; buying dry oil wells; and paying operating expenses at

Hamilton Taft and his Texas companies. To establish that such

uses were improper diversions, the government introduced, among

other evidence, the contracts executed by Hamilton Taft and the

victim-clients (RT 2384 [Ex. 1172], 2482 [Ex. 2482], 2591 [Ex.

1146], 2652 [Ex. 1003], 2700 [Ex. 1093], 2801 [1036], 2822 [Ex.

1051]), plus examples of oral and written representations made by

the sales force and other executives to the victim-clients. RT

2006-2010 [Exs. 923, 1135], RT 2112-2138, 2372-2379 [Ex. 1171],

2477-2481 [Ex. 1075], 2513-2521 [Exs. 1091, 1095], 2533-2539

[Exs. 1131, 1136, 1137], 2583-2584, 2646-2650, 2693-2699, 2819-

2820 [Ex. 1055]. Armstrong looked to the vacated opinion in I__nn

re Hamilton Taft to shelter him from the enormous weight of this

evidence showing improper diversions. There was no shelter to be

found.

44
 The In re Hamilton Taft panel was considering whether

certain payments made by the debtor (Hamilton Taft) to the IRS

ninety days prior to Hamilton Taft's bankruptcy filing were

preferential payments that could be set aside and recovered for

later (partial) distribution to all creditors of the debtor's

estate, pursuant to Bankruptcy Code § 547(b), ii U.S.C. § 547(b) .

The payments in question involved payroll taxes given to Hamilton

Taft by S & S Credit Company ("S&S") under a typical Hamilton

Taft service contract. S&S argued that § 547(b) did not apply

because the funds Hamilton Taft transferred to the IRS were not

property of the debtor, but rat_er funds held in a statutory

trust for the benefit of the IRS, pursuant to Internal Revenue

Code § 7501. The panel concluded that the funds were not in an

IRS statutory trust because the statutory trust dissolved when

S&S transferred the funds to a third party - Hamilton Taft. As a

result, the payments to the IRS were "avoidable" under the

Bankruptcy Code. I__dd.at 288.

The case analyzes the scope of a. particular IRS statutory

trust, and how its presence, or absence, effects a preferential

transfer under the Bankruptcy Code. The case says nothing about

the extent to which Armstrong could treat the victim-clients'

payroll taxes as his own private treasury. In fact, the panel in

45
In re Hamilton Taft appears to have assumed that Armstrong could

not usethe funds for his own purposes:

Approximately $6 billion of client money flowed through

Taft's accounts annually. However, because of bad
investments and other improper handlinq of these funds, Taft
came to have dramatic cash flow problems and fell behind in
making tax payments on behalf of its clients. It then began
selectively withholding federal payroll taxesduring the
first month of each quarter in order to use those funds to
pay delinquent taxes from the prior quarter. But in March,
1991, a former Taft comptroller disclosed the improper
diversion of funds, and Taft's clients filed the involuntary
bankruptcy petition that gave rise to this action.

I_dd. at 287. Emphasis added.

The case does not even address the possibility of a trust

relationship developing between Hamilton Taft and its victim-

clients based on contract or oral representations. It deals only

with a statutory trust relationship between the IRS and the tax-

paying clients of Hamilton Taft.

The district court recognized the limited holding of In re

Hamilton Taft when rejecting the instruction before trial

started:

I don't think their decision holds in any way that those

funds can't be deemed trust funds for some criminal purpose.

The case dealt only with the bankruptcy preference and an

IRS statute. And I don't think it touches--perhaps by
analogy, but only by analogy, the question of the more
fundamental relationship between the creditors and Hamilton
Taft and the people who put the money in, if you don't want
to call them creditors, and what the obligations are. I

46
 don't think that that case determines it.

RT 22.

The district court then stated that the facts of the trial

would reveal the nature of the pertinent relationships, through

the contracts, the commitments, and evidence of what was done

with the money. RT 22-23.

That evidence clearly established that Hamilton Taft

promised to make timely and accurate deposits, and to accurately

prepare and file tax returns on time. See, for example, Exhibits

i001, 1131, 1135. The evidence clearly established that, based

on the representations made orally and in writing to the victim-

clients, Armstrong was no% authorized to use the payroll taxes as

he did, that is, as his own funds--holding them for as long as he

liked, and using them for any purpose he chose.

The proposed "theory of defense" instruction, therefore, was

supported neither by the law, nor by the pertinent facts.

Moreover, the proposed instruction did not really relate

Armstrong's "theory of defense." Armstrong never contested "what

happened" to the money. He never contested the fact that

deadlines were missed, checks were pulled, and client funds were

used for his own purposes. He defended this case by arguing he

was in "good faith" in using the money as he did_ he, therefore,

47
lacked the necessary "intent to defraud." RT 4387-4389, 4405-

4407, 4643-4644. If the district court had given the proposed

instruction, the jury would not have been guided to a clearer

understanding of the legal limits of the theory of Armstrong's

defense. Rather, Armstrong would have been given an

inappropriate evidentiary "leg-up" by having the district court

tell the jury, regardless of the representations and commitments

made by Armstrong to the victim-clients, that Armstrong, as a

matter of law, could use the funds for any purpose. Such an

instruction, predicated solely on the vacated, inapposite opinion

in In re Hamilton Taft would have been simply wrong.

The jury was appropriately instructedthat "good faith" was

a complete defense to the charges in the indictment. 8 The

8 The district court instructed the jury:

"The good faith of a defendant is a complete defense to the

charges in the indictment, because good faith on the part of
a defendant is inconsistent with the intent to defraud and
with the intent to obtain money by false pretenses.

A person who acts, or causes another person to act, on a

belief or opinion honestly held is not punishable merely
because the belief or opinion turns out to be inaccurate,
incorrect or wrong. An honest mistake in judgment or an
error in management does not rise to the level of intent to
defraud.

However, a defendant does not act in "good faith" if, even

though he honestly holds a certain opinion or belief, that

48
district court's formulation was correct and adequately set forth

Armstrong's theory of defense. The district court did not err by

refusing to give the proposed instruction that was not supported

by the law nor the pertinent facts in evidence.

V. THE TRIAL COURT'S EX PARTE CONTACT WITH THE JURY DOES NOT
PROVIDE A BASIS FOR REVERSAL

A. The Court's Ex Parte Contact With The Jury

During its deliberations the jury sent three notes 9 to the

district court. Twowere sent on February 24, 1997. The jury

defendant also knowingly makes false or fraudulent

pretenses, representations or promises to others.

While the term "good faith" has no precise definition, it

means, among other things, a belief or an opinion honestly
held, an absence of malice or ill will and an intention to
avoid taking fraudulent advantage of another.

In determining whether or not the government has proved that

a defendant acted with an intent to defraud, or an intent to
obtain money by false pretenses, or whether the defendant
acted in good faith, you must consider all of the evidence
in the case that bears upon that defendant's state of mind.

The burden of proving good faith does not rest on the

defendants, because defendants do not have an obligation to

prove anything. It is the government's burden to prove to
you, beyond a reasonable doubt, that defendant Armstrong
and/or defendant Fowles acted with the intent to defraud or
the intent to obtain money by false pretenses." RT 5539-
554O.

9 The notes should be found at CR 317. Plaintiff could not

find the note there, but a copy is found at CR 312 in the Fowles
record and is attached as Addendum 2.

49
 first note sought an exhibit which was not in evidence and the

court so informed them. RT 5873.

The second note asked two questions which the court answered

in writing. RT 5873-5874. The jury asked if page i, lines 17 to

25 of the instructions [the jury was provided with written

instructions] conflicted with page 6, lines ii to 16. Addendum

2. I° The court responded that the first part of the instructions

defined the overall scheme while the second part the elements of

the offenses charged in counts 1 through 3. Addendum 2. The

10 The page numbers on the instructions correspond on a one-

to-one basis to transcript pages 5529 to 5541. 5529 is page i,
5530 is page 2, and so on. Page i, lines 17 to 25, read as
follows:

All of the counts of the indic£ment charge that Mr.

Armstrong knowingly devised a scheme to defraud or to obtain
money by false pretenses and that he undertook to advance or
further the scheme in three different ways. [] Number one,
counts 1 through 3 charge that Mr. Armstrong induced travel
in interstate commerce in execution or concealment of the

scheme. And defendant Mr. Fowles is charged with aiding and

abetting Mr. Armstrong in counts 1 and 2 of those first
three counts. RT 5529.

Page 6, lines ii through 16, read as follows:

Number one, that the defendants devised a scheme to defraud,

or a scheme to obtain money by means of false pretenses.
And, number two, that the defendants induced a victim of the
scheme to travel in interstate commerce in the execution or

concealment of the scheme to defraud the victim out of money

in excess of $5,000. RT 5534.

5O
jury also asked whether, with respect to Fowles, aiding and

abetting needed "to include devising the plan or scheme" as to

counts 1 and 2. Addendum 2. The court responded by directing

the jury's attention to appropriate parts of the instructions.

RT 5531, 5538-5539. Armstrong does not contend that any of those

answers were incorrect.

On February 25, 1997, while the jury was deliberating, it

sent a note to the district court seeking the testimony of Dora

Dunn. RT 5874. The court redacted all of the sidebar

discussions from a transcript that had previously been prepared

and sent it to the jury without instruction. RT 5875.

Defense counsel sought a mistrial (RT 5875, 5900-5904; CR

312) which the court denied. RT 5877-5878, 5897. Later, the

court was informed that the jury had reached a verdict. RT 5882. '

Rather than take the verdict, the court recessed to assess the

issues raised by defense counsel, including the claim that a

mistrial was required by United States v. Hernandez, 27 F.3d 1403

(9th Cir. 1994), cert. denied, 115 S. Ct. 1147 (1995). RT 5886.

When proceedings resumed, the court ruled that Hernandez was

distinguishable, but nevertheless felt it prudent to admonish the

jury. I__dd. The jury was returned to the court room and

instructed as follows:

5]
 Now, I'm instructing you that the transcript cannot serve as
a substitute for your memory or your assessment of her
credibility. The transcript is to be used merely as an aid.
[] You should weigh all of the evidence in the case and not
focus on anY one portion of the trial and transcript is not
authoritative and should not prevail over your memory of Ms.
Dunn's testimony. [] Now I'm instructing you to return to
your deliberations tomorrow morning and to render your
verdicts in light of they [sic] knew [sic] n instructions
that I'm now giving to you with respect to Ms[ Dunn's
testimony.

RT 5893-5894.

The following morning, before the jury returned, defense

counsel agreed that there were no errors in the transcript that

had gone to the jury. RT 5905. The court reaffirmed its belief

that Hernandez was distinguishable, noting the number of

witnesses who testified regarding the issues in the case, the

number of exhibits received in evidence, the fact that the

testimony of Dunn was not limited to a single issue, the jury's

instructions to consider all of the evidence, and the length of

the trial and the deliberations. RT 5909-5910. The court then

re-instructed the jury:

Ladies and gentlemen, I'm going to again instruct you on the

issue that I discussed with you yesterday afternoon and that
is the transcript of the testimony of Laura [sic] Dunn. []
At your request the complete transcript of the testimony of
Ms. Dunn, both her direct and cross-examination was provided
to you yesterday. You're instructed that the transcript is

II It should read _the new."

52
 not a substitute for your memory or your assessment of her
credibility. The transcript is not authoritative and should
not prevail over your memory of Ms. Dunn's testimony or her
credibility. The transcript is merely to be used as an aid.
Your should weigh all of the relevant trial evidence and not
focus on any one single portion of it. [] I also instruct
you that it's been stipulated that Mr. Fowles was not 'the
president of Hamilton Taft at any time after September i st
of 1990. [] Now, if you have made a decisions [sic] based
in part upon your reading of Ms. Dunn's transcript I ask and
direct that you again consider those decisions in light of
the instructions that I have now given you. And you may
take whatever time you need for that consideration. [] If
as a result of that you reach a different decision regarding
one or more of the counts or one or more, or one or both
defendants then please fill out and sign a new verdict form
and destroy the old one.

RT 5911-5912.

Later that morning the jury returned verdicts finding

Armstrong guilty on all counts. RT 5913.

So
Law Of The Case Precludes Reconsideration Of The Impact
Of The Court's Ex Parte Contact With The Jury

Armstrong raises two related issues: the submission of the

Dora Dunn transcript to the jury without cautionary instructions

and the trial court's ex parte contact with the jury. He is

precluded from raising these issues by law of the case.

"The law of the case doctrine provides that 'a court is

generally precluded from reconsidering an issue that has already

been decided by the same court, or a higher court in the

identical case.'" United States v. Cuddy, 147 F.3d iiii, 1114

53
 (9th Cir. 1998), citing United States v. Alexander, 106 F.3d 874,

876 (9th Cir. 1997). The rule applies where the issue raised was

resolved adversely in the appeal of a co-defendant. United

States v. Zarate-Martinez, 133 F.3d 1194, 1200 (9th Cir.), cert.

denied, 119 S. Ct. 123 (1998); United States v. Amlani, iii F.3d

705, 719 (9th Cir. 1997). A court only has discretion to avoid

law of the case where:

i) the first decision was clearly erroneous; 2) an

intervening change in the law has occurred; 3) the evidence
on remand is substantially different; 4) other changed
circumstances exist; or 5) a manifest injustice would
otherwise result.

United States v. Cuddy, supra, 147 F.3d at 1114.

This Court is bound by the law of the case because the same

issues regarding the trial court's ex parte contacts with the

jury were raised by Armstrong's co-defendant, Fowles, in his

appeal. In addressing the submission of the Dora Dunn

transcript, the Court stated:

In this case, there was no undue emphasis. First, there was

an overwhelming amount of evidence against appellant.
second, although the testimony furnished to the jury was
important, it did not determine the outcome of the
case .... Third, the manner in which the district court
ultimately provided the transcript to the jury assured there
was no undue emphasis .... In sum, there was no undue

emphasis on the testimony furnished to the jury during

deliberations.

Addendum 1 at p. 3. In assessing Fowles' allegation of a

54
violation of Rule 43 of the Federal Rules of Criminal Procedure,

the Court held:

Violations of Rule 43 are subject to a harmless error

analysis under Federal Rule of Criminal Procedure
52(a) .... In this case, the government demonstrated that
the ex parte communications did not affect the verdict.
Neither the content of the communications nor the manner in

which they were made resulted in any prejudice to appellant.

To repeat, the evidence against him was overwhelming.

Addendum I, p. 5.

No basis exists for departing from the law of the case.

There have been no changes in the law or other circumstances.

The Fowles opinion was clearly correct. Dunn's testimony was

largely focused on Fowles' role in Hamilton Taft, n and the

questions asked by the jury related to Fowles' culpability. If

the trial court's actions did not compel reversal in Fowles'

case, they certainly did not harm Armstrong.

C. Standard Of Review

The trial court's decision to allow the rereading of

testimony during jury deliberations is reviewed for abuse of

discretion. United States v. Rincon, 28 F.3d 921, 927 (9th

L2 While Armstrong suggests Dunn's testimony was "extremely

damaging" (AOB 63), in reality she had little contact with
Armstrong and she was only one of several sales persons (Holloway
[RT 2508-2552], Estes [RT 2735-2784] and Boone Armstrong [RT
3865-3908]) who gave similar testimony.

55
Cir.), cert. denied, 513 U.S. 1029 (1994); United States v.

Binder, 769 F.2d 595, 600 (gth Cir. 1985).

Under Rule 52(a), if the defendant objects at trial to an

improper ex parte communication with the jury, the government

bears the burden of proving the error was harmless. United

States v. Throckmorton, 87 F.3d 1069, 1072-1073 (gth Cir. 1996),

cert. denied, 519 U.S. 1132 (1997).

D. The Submission Of The Transcript To The Jury Was Not

Error

In Binder, the court held that a determination to allow

rereading of testimony must be based on the facts and

circumstances of the case, and that the court should not permit

undue emphasis on particular testimony. 769 F.2d at 600.

Subsequent cases have assessed _ the quantum of other

evidence against the defendant, the importance of the .

testimony in relation to the other evidence against the

defendant, and the manner in which the . " evidence was

presented to the jury. United States v. Sacco, 869 F.2d 499, 502

(9th Cir. 1989). A review of those factors demonstrates that the

court did not err in giving the transcript to the jury.

The first factor is the quantum of other evidence against

the defendant. In Binder and Hernandez the defendants'

56
convictions were reversed based on the submission of recorded

testimony to the jury during deliberations because the re-read

evidence was the only direct evidence against them. 769 F.2d at

598; 27 F.3d at 1405. Contrast Sacco which held the rereading of

testimony not to beerror since there was significant evidence in

addition to the replayed testimony. 869 F.2d at 502; see also

United States v. Felix-Rodriquez, 22 F.3d 964 (gth Cir. 1994).

Here the presentation of the government's case involved the

testimony of almost thirty witnesses and the offer of more than a

hundred exhibits. No one witness could (or did) repeat the

entirety of the government's case, and the evidence presented by

the government through the testimony of witnesses other than Dunn

was overwhelming. See pp. 4-23, su__qp_r_.

The second part of the analysis looks to the importance of

the replayed evidence in relation to the other evidence. Thus,

Binder's guilt of child molestation hinged on who the jury

believed, Binder or two young children who lived with him. The

Court held that "[c]redibility became a crucial issue" and that

replaying the videotaped testimony of the children during

deliberations unduly emphasized their testimony over that of

Binder himself. 769 F.2d at 601. Similarly, in Hernandez, the

only issue was identity, and sending the jury a transcript with

57
knowledge that it intended to focus on a narrow part of the

transcript unduly emphasized a narrow, significant issue and

mandated reversal. 27 F.3d at 1409.

Dunn said virtually nothing about Armstrong; she saw him

only several times. Most of her testimony related to her sales

efforts and her contact with Fowles. Dunn's testimony was

insignificant, presented no new facts and was not of such

significance that its re-submission to the jury unduly emphasized

the government's case to Armstrong's prejudice.

The third factor to be analyzed according to Sacc_, is the

manner in which the transcript was submitted to the jury.

In United States v. Lujan, 936 F.2d 406 (9th Cir. 1991), this

Court approved submission of a transcript to the jury where

counsel were permitted to note inaccuracies in the transcript and

the jury was given cautionary instructions. 936 F.2d at 412; see

also United States v. Montgomery, 150 F.3d 983, 999-1000 (9th

Cir.), cert. denied, 119 S. Ct. 267 (1998).

Here, counsel did not have the opportunity to review the

transcript in advance for inaccuracies, but there were none. RT

5905. Moreover, the transcript was properly redacted. Unlike

the jury in Binder, 769 F.2d at 601, the jury received all of

Dunn's testimony; the transcript was redacted to remove matters

58
out of the presence of the jury and included the complete direct

and cross-examinations of Dunn. RT 5911.

Any error in the initial submission of the transcript to the

jury stems not from its content but from the failure to give the

cautionary instruction required by Lu_an. With the breadth and

scope of testimony in this case, however, even if the absence of

such an instruction resulted in undue emphasis on any or all of

Dunn's testimony it could not have brought about the verdicts

ultimately returned against Armstrong.

In any event, once defense counsel objected, the court took

the appropriate step, gave the jury the instructions approved in

Lujan and asked the jury to return to its deliberations in accord

with this new instruction. RT 5911-5912. Asking the jury to

return to its deliberations even after they said they had a

verdict was within the court s discretion. United States v.

Freedson, 608 F.2d 739, 741 (9th Cir. 1979). This Court must

presume that the jury followed those instructions. United States

v. Olano, 507 U.S. 725, 740 (1994); Masoner v. Thurman, 996 F.2d

1003, 1008 (9th Cir.), cert. denied, 510 U.S. 1028 (1993). The

court did all that it was expected to do.

In this case there was significant, compelling other

evidence of Armstrong's guilt, Dunn's testimony was insignificant

59
 in relation to the other evidence presented to the jury and the

jury was given appropriate cautionary instructions to accompany

the transcript of Dunn's testimony. The court did not abuse its

discretion in submitting the transcript of Dunn to the jury.

Moreover, in light of the overwhelming evidence of Armstrong's

guilt, any error was harmless.

E. Any Error In Communicating With The Jury Ex parte Was

Harmless

The factors to be analyzed in determining whether an ex

parte communication is harmless are the probable effect of the

message sent, the likelihood that the court would have sent a

different message had it consulted the defendant beforehand and

whether any changes in the messages defendant might have obtained

would have affected the verdict in any way. United States v.

Frazin, 780 F.2d 1461, 1470-1471 (9th Cir.), cert. denied, 479

U.S. 844 (1986).

The first ex parte communication occurred when the jury

sought an exhibit from the court that was not in evidence. The

court responded that the exhibit was not in evidence and did not

send the exhibit to the jury. RT 5873. There is no issue here.

The second ex parte communication occurred when the jury

asked questions about the instructions. The court did no more

6O
 than differentiate for the jury the introductory remarks from

offense specific instructions. See RT 5529-5533; 5533-5537. In

responding to the jury's second question regarding aiding and

abetting, the short answer to the jury's question would have been

"no," that Fowles need not have devised the scheme, and that it

would be sufficient if he joined the scheme at some time with the

requisite intent. United States v. Lothian, 976 F.2d 1257, 1267

(gth Cir. 1992). By referring the jury to the instructions the

court took the safe, appropriate route.

Applying the three factors set forth in the Frazin analysis,

the effect of the court's message was to direct the jury to the

instructions and toward the completion of its task. Had counsel

been consulted, the onlydifferent answer might have been the

short one -- that Fowles need not have devised the scheme.

Assuming that to be the case, the result would have been the

same. Clearly the court's ex parte answers to these questions

regarding the jury instructions were harmless beyond any possible

doubt as to Armstrong. See United States v. Barraqan-Devis, 133

F.3d 1287, 1289-1290 (gth Cir. 1998).

The last ex parte communication occurred when the court

responded to the jury's request for the testimony of Dora Dunn by

sending the redacted transcript to the jury. Had counsel been

61
notified there are three realistic possibilities: the jury would

have received the transcript as it did but with the limiting

instruction later given by the court, the transcript would have

instead been read to the jury together with the limiting

instruction, or the court would have rejected the jury'.s request

and refused any reread. (This latter appears highly unlikely.)

Whichever of these might have happened, the result in this case

would have been the same. There is no real argument to the

contrary given: I) the evidence of Armstrong's guilt from other

witnesses and exhibits was overwhelming; 2) Dunn's testimony was

insignificant compared to the testimony of other witnesses; and

3) the court ultimately gave stringent limiting instructions that

the jury must be presumed to have followed. For all these

reasons, this erroneous ex-parte communication, like the others,

was harmless.

62
 CONCLUSION

For all the reasons stated above, Armstrong's conviction and

sentence of 108 months should be affirmed.

Dated: _?_/ /_ Respectfully submitted,

ROBERT S. MUELLER, III

United States Attorney
Northern District of California

J. DOUGLAS WILSON

Chief, Appellate Section

GEORGE D. HARDY

Assistant United States Attorney

SM T A
Special Assistant
United States Attorney

Attorneys for Plaintiff-Appellee

UNITED STATES OF AMERICA

63
 NOTICE OF RELATED CASE

The conviction of co-defendant Richard A. Fowles was

affirmed on June 2, 1999, in an unpublished opinion issued by

this Court. The caption was United States v. Richard A. Fowles,

C.A. No. 97-10513, NDCA No. CR 94-0276-CAL. I am not aware of

any other cases pending before this Court which are related to

the instant appeal.

Dated:
SMETANA

Special Assistant U.S. Attorney

64
 CERTIFICATE OF COMPLIANCE WITH CIRCUIT RULE 32(e)

I certify that this brief contains double-spaced lines

(except as permitted by Rule 32(c)), which uses monospaced

typeface of ten characters per inch, and contains 13,472 words,

in compliance with the 14,000 word maximum length as specified in

Circuit Rule 32 (e) (2) (ii) .

Dated: _//! /_

Special Assistant U.S. Attorney

65
 CERTIFICATE OF SERVICE
United States v. Connie Armstrong, Jr.
Case No. 97-10392
(NDCA) CR-94-0276-CAL

The undersigned hereby certifies that she is an employee of the Office of the United States

Attorney for the Northern District of California and is a person of such age and discretion to be

competent to serve papers. The undersigned further certifies that she is causing two copies of the

APPELLEE'S BRIEF, to be served this date by regular United States mail the counsel of record

at his address as follows:

DAVID A. N1CKERSON, Esq.

454 Las Gallinas Avenue, Suite 183
San Rafael, California 94903

1 declare under penalty of perjury that the foregoing is true and correct.

Executed the 1 lth day of August, 1999, at San Francisco, California.

United States Attorney's Office

ADDENDUM 1
 FILED
*Corrected June 4, 1999
JUN 02 1999
NOT FOR PUBLICATION

CATHY A. CATTERSON, CLERK

U.S. COURT OF APPEALS

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, No. 97-10513

Plaintiff-Appellee, D.C. No. CR-94-00276-2-CAL

V.

MEMORANDUM I
RICHARD FOWLES,

Defendant-Appellant.

Appeal from the United States District Court

for the Northem District of California
Charles A. Legge, District Judge, Presiding

Argued and Submitted May 10, 1999"

San Francisco, Califomia

Before: SNEED, MICHEL 2 and THOMAS, Circuit Judges.

Richard A. Fowles ("appellant") appeals from his conviction in the United

States District Court for the Northern District of California, the Honorable Charles

i This disposition is not appropriate for publication and may not be cited to or by the courts
of this circuit except as may be provided by 9th Cir. R. 36-3.

Honorable Paul R. Michel, United States Circuit Judge for the Federal Circuit, sitting by
designation.
 A. Legge, Presiding, on six counts of aiding and abetting co-defendant Connie C.

Armstrong ("co-defendant") in a scheme to defi'aud and obtain money by false

pretenses under 18 U.S.C. §§ 1343, 2314 (1998). Appellant argues that the district

court committed reversible error by permitting the jury to reread a portion of the

trial transcript during jury deliberations. He further contends that it was reversible

error for the district court to communicate ex parte with the jury. Finally, appellant

argues that he was not present at trial on January 6, 1997, and that it was reversible

error for the district court to proceed in his absence. We have jurisdiction pursuant

to 28 U.S.C. § 1291 and affirm.

Appellant first argues that the district court committed reversible error when it

provided a portion of the trial transcript to the jury during its deliberations. We

disagree. Once deliberations begin, the district court must not allow particular

testimony to be unduly emphasized. See United States v. Binder, 769 F.2d 595,600

(gth Cir. 1985). To determine whether the jury unduly emphasized testimony by

rereading it during deliberation, this Court looks to "the quantum of other evidence

against the defendant, the importance of the [reread] testimony in relation to other

evidence, and the manner in which the [testimony] was [presented to the jury]."

United States v. Sacco, 869 F.2d 499, 502 (9th Cir. 1989).
 In this case, there was no undue emphasis. First, there was an overwhelming

amount of evidence against appellant. In proving its case, the government called

some thirty witnesses and offered more than a hundred exhibits. Numerous

witnesses testified specifically as to appellant's fraudulent intent, while others

provided circumstantial evidence of the general scheme. Second, although the

testimony furnished to the jury was important, it did not determine the outcome of

the case. For the most part, it merely corroborated the testimony of other witnesses.

Third, the manner in which the district court ultimately provided the transcript to the

jury ensured that there was no undue emphasis. Although the district court initially

failed to notify the parties or give precautionary instructions to the jury, it corrected

its own mistake and sent the jury back to reach a f'mal verdict. Before sending the

jury back to re-deliberate, the district court twice issued precautionary instructions

taken verbatim from United States v. Lujan, 936 F.2d 406, 411-12 (9th Cir. 1991),

and permitted counsel to review the transcript for inaccuracies. In sum, there was

no undue emphasis on the testimony furnished to the jury during deliberations.

Appellant next contends that the district court violated his right to be present

at trial. The Constitution, a long line of Supreme Court cases and Federal Rule of

Criminal Procedure 43 guarantee a criminal defendant the right to be present "at

every stage of the trial." See, e_&.., Rogers v. United States, 422 U.S. 35, 39, 95 S.
 Ct. 2091, 2095, 45 L. Ed. 2d 1 (1975). Appellant contends.that the district court

violated his constitutional and Rule 43 right to be present on two occasions; first,

when it proceeded in his absence during trial on January 6, 1997, and second, when

it engaged in ex parte communications with the jury during deliberations. We reject

both contentions.

First, there is no support for appellant's assertion that he was absent from the

courtroom on January 6, 1997. On that day, the judge postponed the start of the

proceedings because appellant and a witness were delayed apparently by a public

transportation problem. The judge stated that the court was ready to proceed only

atter appellant's counsel assured the court that appellant was ready. Although the

court did not note expressly appellant's presence, appellant's counsel did not state

that appellant was absent. Nor did counsel object to the proceedings at any time

during trial or in a post-trial motion. See generally United States v. Gagnon, 470

U.S. 522, 528, 105 S. Ct. 1482, 1485, 84 L. Ed. 2d 486 (1985) (holding that Rule

43 fights were waived where defendant did not object at time of proceedings or

make any post-trial motions, "although post-trial hearings may otten resolve this sort

of claim"). Nor does appellant refute the govemment's assertion that trial counsel

for both sides recall appellant's presence. For these reasons, we conclude that

appellant was present on January 6, 1997.

4
 Second, although the district court erred when it communicated ex parte with

the jury, that error was harmless. Violations of Rule 43 are subject to a harmless

error analysis under Federal Rule of Criminal Procedure 52(a).. See Rogers v.

United States, 422 U.S. 35, 39-40, 95 S. Ct. 2091, 2095, 45 L. Ed. 2d 1 (1975)

(citation omitted). In order to show harmless error, the government must

demonstrate, see United States v. Throckmorton, 87 F.3d 1069, 1072-73 (9th Cir.

1996), "beyond a reasonable doubt that the error complained of did not contribute to

the verdict obtained." See United States v. Frazin, 780 F.2d 1461, 1469-70 (9th

Cir. 1986) (citing Chapman v. California, 386 U.S. 18, 24, 87 S. Ct. 824, 828, 17 L.

Ed. 2d 705 (1967)). In this case, the government demonstrated that the ex parte

communications did not affect the verdict. Neither the content of the

communications nor the manner in which they were made resulted in any prejudice

to appellant. To repeat, the evidence against him was overwhelming.

For the foregoing reasons, we affh-m.

ADDENDUM 2
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