     06-1495-cr(L), 06-1710-cr(CON)
     United States v. Shellef and Rubenstein

1                         UNITED STATES COURT OF APPEALS

2                             FOR THE SECOND CIRCUIT

3                                August Term, 2006

4     (Argued: December 18, 2006             Decided: November 8, 2007
5                                       Errata Filed: November 19, 2007)
6                  Docket Nos. 06-1495-cr(L), 06-1710-cr(CON)

7                    -------------------------------------

8                            UNITED STATES OF AMERICA,

9                                     Appellee,

10                                       - v -

11                     DOV SHELLEF and WILLIAM RUBENSTEIN,

12                            Defendants-Appellants.

13                   -------------------------------------

14   Before:     POOLER, SACK, and WESLEY, Circuit Judges.

15               Appeal from judgments of conviction following a trial

16   in the United States District Court for the Eastern District of

17   New York (Joanna Seybert, Judge) for wire fraud, money

18   laundering, tax evasion, filing false tax returns, and conspiracy

19   to defraud the IRS as to defendant Dov Shellef, and conspiracy to

20   defraud the IRS and wire fraud as to defendant William

21   Rubenstein.    We conclude that the indictment improperly joined

22   certain tax counts with the other charges against the defendants,

23   that it improperly joined Shellef and Rubenstein as defendants,

24   and that the misjoinders were not harmless.

25               Vacated and remanded.
1                             ANDREW L. FREY, Mayer Brown LLP (Andrew
2                             H. Schapiro, Daniel B. Kirschner, Mayer
3                             Brown LLP, Stuart E. Abrams, Frankel &
4                             Abrams, of counsel), New York, NY, for
5                             Defendant-Appellant Dov Shellef.

 6                            ALAN L. ZEGAS, Law Offices of Alan L.
 7                            Zegas, Chatham, NJ (William Nossen, Law
 8                            Offices of Alan L. Zegas, Chatham, NJ,
 9                            and, Robert W. Gluck, Mandelbaum,
10                            Salsburg, Gold, Lazris & Discenza, P.C.,
11                            New Brunswick, NJ, of counsel), for
12                            Defendant-Appellant William Rubenstein.
13
14                            S. ROBERT LYONS, Tax Division,
15                            Department of Justice, Washington, D.C.,
16                            (Eileen J. O'Connor, Assistant Attorney
17                            General, Alan Hechtkopf, Karen M.
18                            Quesnel, Tax Division, Department of
19                            Justice, Washington, D.C., and Roslynn
20                            Mauskopf, United States Attorney for the
21                            Eastern District of New York, New York,
22                            NY, of counsel), for Appellee.

23   SACK, Circuit Judge:

24             The defendant Dov Shellef owned or operated several

25   companies engaged in the distribution of industrial chemicals.

26   The defendant William Rubenstein owned or operated Dunbar Sales,

27   Inc., and Stevens Industries, Inc., which also distributed

28   industrial chemicals and provided warehousing, packaging,

29   labeling, and billing services to other distributors.   The

30   chemical at issue in this case -- CFC-113 -- is exempt from

31   excise taxes if its sale comports with applicable federal

32   statutory and regulatory requirements.   Notwithstanding the

33   defendants' representations to the manufacturers from whom they

34   bought the chemical that the defendants would sell it in a manner

35   that would render the sales excise-tax-free, some of Shellef's

36   and Rubenstein's sales of CFC-113 did not comply with at least

                                     2
1    one of these requirements.   The government charged Shellef and

2    Rubenstein jointly with conspiracy to defraud the IRS and wire

3    fraud.   The indictment also charged Shellef (but not Rubenstein)

4    with 1) personal income tax evasion in 1996; 2) filing on behalf

5    of one of his businesses a corporate tax return that was false

6    insofar as it failed to report legitimate income in 1996; and 3)

7    filing a corporate tax return on behalf of another of his

8    businesses that was false insofar as it failed to report income

9    in 1999.   Shellef alone was also charged with money laundering

10   associated with the alleged wire fraud.   A jury convicted Shellef

11   and Rubenstein on all charges against them.1

12              On appeal, Rubenstein argues, as a threshold matter,

13   that the 1996 tax charges against Shellef      were improperly

14   joined with the conspiracy to defraud and wire fraud charges

15   against him.   Shellef similarly argues that the 1996 tax charges

16   should not have been joined with the other charges against him.2

17              Under Rule 8 of the Federal Rules of Criminal

18   Procedure, joinder of criminal charges is permissible when, inter

19   alia, the charges are "based on the same act or transaction."

20   Fed. R. Crim. P. 8(a).   Joinder of tax charges with non-tax

21   charges under Rule 8 is therefore permissible if "the tax



          1
            The government dismissed three of the wire fraud counts
     against Shellef and Rubenstein.
          2
            Shellef and Rubenstein each request that we adopt
     whichever arguments in the other's brief may be applicable to
     him. We do so, but for ease of exposition refer individually to
     the appellant in whose brief a particular argument was made.

                                      3
1    offenses arose directly from the other offenses charged," such as

2    when the funds derived from the acts underlying the non-tax

3    charges "either are or produce the unreported income" that is the

4    basis for the tax charges.    United States v. Turoff, 853 F.2d

5    1037, 1043 (2d Cir. 1988) (internal quotation marks and citations

6    omitted).    Even "if the character of the funds . . . do[es] not

7    convince us of the benefit of joining the[] two schemes in one

8    indictment, other overlapping facts or issues may."    Id. at 1043-

9    44.

10               We conclude that the indictment improperly joined the

11   1996 tax evasion and false return counts against Shellef with the

12   other charges against both defendants because the 1996 counts are

13   not "based on the same act or transaction" as the other charges

14   within the meaning of Rule 8.    We further conclude, for reasons

15   set forth below, that the joinder of Shellef and Rubenstein as

16   defendants in the indictment was also improper.    Because the

17   government has not established that the misjoinders of charges

18   and defendants were harmless, we vacate the judgments of

19   conviction and remand for further proceedings.

20               Shellef and Rubenstein raise several other issues on

21   appeal that we need not decide in light of our disposition of the

22   question of joinder: 1) the legal sufficiency of the wire fraud

23   and conspiracy indictments; 2) the evidentiary sufficiency of the

24   conviction for wire fraud; 3) the propriety of several

25   evidentiary rulings made by the district court; and 4) the

26   propriety of the jury instructions.    We nonetheless discuss all

                                       4
1    but the district court's evidentiary rulings to guide the

2    district court on retrial.

3                                 BACKGROUND

4              Because the jury returned a guilty verdict, the

5    evidence presented to it is construed "in the light most

6    favorable to the government."    United States v. Naiman, 211 F.3d

7    40, 46 (2d Cir. 2000) (citation omitted).     Except where noted

8    below, the parties do not dispute the relevant material facts.

9              The Defendants

10             The defendant Dov Shellef owned or operated four

11   companies: Poly Systems, Inc. ("Poly Systems"); PolyTuff, Ltd.

12   ("PolyTuff"); PolyTuff USA, Inc. ("PolyTuff USA"); and Poly

13   Systems USA, Inc. ("Poly Systems USA").     Poly Systems was an

14   entity located in and doing business from the United States,

15   which sold and distributed defense-related materials, including

16   aircraft manufacturing and maintenance products, primarily to the

17   government of Israel.   PolyTuff, an Israeli company, functioned

18   as Poly Systems's representative in Israel.     Although nominal

19   ownership of PolyTuff was transferred to one Avi Dolev in 1990,

20   Shellef ran the company beginning no later than 1995, when,

21   according to Shellef, Dolev "disappeared."     Test. of Dov Shellef,

22   Trial Tr. 2270-71, July 14, 2005.     PolyTuff USA was located in

23   and doing business from the United States; it had been founded by

24   Dolev in 1992 after the Israeli government refused to continue

25   doing business with Shellef and Poly Systems.     Poly Systems USA

26   manufactured and sold industrial solvents.

                                       5
1              Rubenstein is the executive vice president and a forty-

2    five percent owner of two New Jersey-based companies, Dunbar

3    Sales, Inc. ("Dunbar"), and Stevens Industries, Inc. ("Stevens").

4     The companies buy a variety of industrial chemicals and re-sell

5    them to the United States and foreign governments.   These

6    entities also provide warehousing, packaging, labeling, shipping,

7    and bill collection services.   Rubenstein provides day-to-day

8    management for the companies.

9              In 1995, Rubenstein and Shellef began working together

10   in an attempt to profit from an impending ban on domestic

11   production of CFC-113.   Their plan was to purchase a large volume

12   of CFC-113 that had been produced and stockpiled in anticipation

13   of the ban on production and to sell it to entities that would

14   have difficulty obtaining it elsewhere thereafter.

15             In 1998, Stevens became a co-owner, with Shellef, of

16   Poly Systems USA.   That year, Shellef or his company Poly Systems

17   transferred cash to Poly Systems USA as capital.   Around that

18   time, Shellef also invested in three unrelated real estate

19   ventures that Rubenstein had undertaken.

20             Regulatory Regime Governing CFC-113

21             CFC-113 is a highly regulated, ozone-depleting

22   industrial solvent commonly used to remove grease from metal.

23   Global regulation of CFC-113 began in earnest following the

24   ratification of the Montreal Protocol on Substances that Deplete

25   the Ozone Layer (the "Montreal Protocol") in 1987.   Montreal

26   Protocol, Sept. 16, 1987, S. Treaty Doc. No. 100-10, 1522

                                      6
1    U.N.T.S. 29.   Pursuant to the Montreal Protocol, Congress sharply

2    limited American production of CFC-113 as part of the Clean Air

3    Act, 42 U.S.C. §§ 7401 et seq.   The Act implemented a phased ban,

4    to be completed by 2000, of the "production and consumption" of

5    the substance in the United States.   See 42 U.S.C. § 7671c.

6    Previously stockpiled CFC-113 could, however, still lawfully be

7    used in the United States.   As an incentive for discontinuance of

8    such use, Congress imposed an excise tax on any CFC-113 "sold or

9    used by the manufacturer . . . thereof."    See 26 U.S.C. §

10   4681(a)(1) (imposing a tax on sales of ozone-depleting

11   chemicals); 26 U.S.C. § 4682(a)(2) (including CFC-113 within the

12   definition of ozone-depleting chemicals).

13             Congress carved out three exceptions to the

14   applicability of the excise tax, two of which are relevant here.

15   See 26 U.S.C. § 4682(d).

16             First, CFC-113 that has been "diverted or recovered in

17   the United States as part of a recycling process (and not as part

18   of the original manufacturing or production process)" is not

19   subject to the tax.   26 U.S.C. § 4682(d)(1).   Such diverted or

20   recovered CFC-113 is known as "reclaimed CFC-113."    Newly

21   manufactured CFC-113, by contrast, is referred to as "virgin CFC-

22   113."

23             Second, the statute exempts "sale[s] by the

24   manufacturer or producer of [CFC-113] for export, or for resale

25   by the purchaser to a second purchaser for export."    26 U.S.C.

26   § 4662(e)(1)(A); see also 26 U.S.C. § 4682(d)(3) (incorporating

                                      7
1    section 4662(e) by reference).   The statutes and regulations

2    thereunder impose three procedural requirements for a sale to

3    qualify for this export exemption: 1) both parties must be

4    registered with the Internal Revenue Service ("IRS"), see 26

5    C.F.R. § 52.4682-5(d)(1)(i)(B); 2) the purchaser must provide the

6    manufacturer with a certificate containing a sworn statement from

7    the purchaser that the CFC-113 will be exported, see 26 C.F.R.

8    § 52.4682-5(d)(1)(i)(C), (d)(3); and 3) the manufacturer must

9    receive proof of export within six months of the initial sale,

10   see 26 U.S.C. § 4221(b) (requiring proof of export); 26 U.S.C.

11   § 4662(e)(1)(B) (incorporating section 4221(b) by reference).

12              Elf Atochem CFC-113

13              In 1995, Rubenstein's Stevens placed five purchase

14   orders with Elf Atochem ("Elf") for a total of 217,812 pounds of

15   CFC-113 imported from an Elf affiliate in France (the "Elf CFC-

16   113").3   Elf initially charged Stevens $1,152,516.78 for the Elf

17   CFC-113, which price included, in addition to a relatively modest

18   base price, the applicable excise tax of $819,599.58.   The

19   parties stipulated before trial, however, that Rubenstein

20   initially intended to export the Elf CFC-113, as he had

21   represented to Elf that he would in order to negotiate an excise-


          3
            At trial, an IRS agent testified that Rubenstein purchased
     21,768 pounds of CFC-113 in 1995. The government, in questioning
     the witness, referred to Rubenstein's purchase of 201,000 pounds.
     Our own calculation using the witness's testimony regarding the
     applicable invoices indicates that Rubenstein purchased 217,812
     pounds. We assume that the witness's reference to 21,768 pounds
     is a transcription error or that the government attorney
     misspoke.

                                      8
1    tax-free agreement.   Rubenstein further attempted to register

2    with the IRS to satisfy his obligations under section 4682(d).

3    Elf, which had previously paid the excise tax to the IRS on its

4    quarterly return, took a credit for it on a subsequent return,

5    and credited Rubenstein's account for the previously invoiced

6    tax.4

7                Rubenstein exported nearly 190,000 pounds -- or all but

8    about 28,000 pounds -- of the Elf CFC-113.   In 1997, however,

9    Rubenstein, with Shellef's help, began to sell the remaining Elf

10   CFC-113 domestically for domestic use notwithstanding the fact

11   that the original sales of any such Elf CFC-113 to Rubenstein's

12   companies would no longer qualify for the excise tax exemption

13   that Rubenstein told Elf would apply to the entire purchase.5

14               Shellef paid an employee of Marisol, Inc., a chemical

15   solvent distributor, to refer Marisol's domestic CFC-113 sales

16   leads to Shellef.   Among the prospects referred to Shellef under


             4
            The record often does not distinguish the acts of
     Rubenstein from those of his corporations, Stevens and Dunbar.
     Here, for example, the witnesses testified that Elf credited
     Rubenstein's account, but the invoices refer to Stevens. Similar
     confusion exists with respect to Shellef and his various
     corporate entities. These distinctions are largely irrelevant
     for our purposes, so we primarily follow the trial transcript.
     With respect to the tax charges against Shellef, however, the
     identity of each entity is important and we are therefore precise
     when we discuss the conduct underlying those charges.
             5
            Shellef and Rubenstein sought to persuade the jury that
     they thought the Elf CFC-113 would also be tax-exempt pursuant to
     26 U.S.C. § 4682(d)(1) because it was "reclaimed." The Elf CFC-
     113, as shipped by Elf, was blended with alcohol. Shellef, a
     chemical engineer by training, put the blended material through a
     water extraction process to separate the CFC-113 from alcohol,
     thus retaining only pure CFC-113.

                                       9
1    that arrangement were All Discount Laboratories ("All Discount")

2    and Custom Laboratories ("Custom"), both based in California.

3                Shellef used Rubenstein's Elf CFC-113 to fill some of

4    All Discount's and Custom's orders.6     On July 14, 1997, Shellef

5    purchased four drums totaling 2,760 pounds of Elf CFC-113 from

6    Rubenstein and resold them to All Discount.      In September and

7    October 1997, Shellef made four shipments of the Elf CFC-113 to

8    All Discount and Custom.    Finally, on September 8, 1998, Shellef

9    purchased Elf CFC-113 from Rubenstein, this time reselling it to

10   Marisol.

11               In sum, between July 1997 and September 1998, Shellef

12   bought approximately 28,000 pounds of Elf CFC-113 from Rubenstein

13   and resold it domestically.    For many of these sales, Rubenstein

14   prepared documents -- labels and invoices -- falsely indicating

15   that the Elf CFC-113 was reclaimed or was being shipped for

16   export.    The excise tax owing and unpaid on these sales of Elf

17   CFC-113 totaled $136,482.

18               Allied Signal CFC-113

19               In 1995, Shellef sought virgin CFC-113 from Allied

20   Signal Inc. ("Allied"), in the United States, purportedly for

21   excise-tax-free resale abroad.      Allied and Poly Systems

22   eventually executed a contract effective January 1, 1996 (the

23   "Allied Contract"), under which Allied was required to



          6
            Custom placed an order on July 9, 1997, seeking twenty
     drums of CFC-113 per month for four months. All Discount placed
     its order on July 11, 1997.

                                         10
1    manufacture 700,000 pounds of CFC-113 (the "Allied CFC-113") for

2    Poly Systems and store it until Poly Systems requested delivery.

3    Poly Systems agreed to purchase and take delivery of all of the

4    Allied CFC-113 sometime prior to December 31, 1997.

5              Under the Allied Contract, Poly Systems could sell the

6    Allied CFC-113 only within a designated territory: Israel, Saudi

7    Arabia, Syria, Egypt, and Jordan.    Because the contract required

8    that the Allied CFC-113 be exported, Allied agreed not to charge

9    Poly Systems the excise tax.   As set forth in Paragraph 8.A of

10   the agreement, Poly Systems bore the risk of future government

11   regulations prohibiting it from selling the CFC-113 so long as

12   Allied spent at least twelve months after the effective date of

13   the regulation "exercis[ing] reasonable commercial efforts to

14   sell [the Allied CFC-113] to other parties who are permitted to

15   use [it]," with the proceeds of any such sale that exceeded the

16   contract price to be divided equally by Poly Systems and Allied.

17   Allied Contract, effective Jan. 1, 1996, at 3 ¶ 8.A.

18             The Allied Contract required Poly Systems to pay an up-

19   front $140,000 reservation fee, of which Rubenstein paid half in

20   exchange for a share of the profits Poly Systems would earn

21   selling Allied CFC-113 to the Israeli government.   Although

22   Rubenstein did not receive a share of Poly Systems's profits from

23   domestic sales of Allied CFC-113, he did store some in his

24   warehouse in Bayonne, New Jersey, and shipped the product as Poly

25   Systems directed.



                                     11
1              Poly Systems's initial sales were to the Israeli

2    government.   But Israel -- like the United States, a signatory to

3    the Montreal Protocol -- was attempting to reduce its

4    manufacture, importation, and use of ozone-depleting chemicals,

5    including CFC-113.   By December 1997, Israeli purchases of CFC-

6    113, which had slowed in 1996, came to a halt.   Shellef's orders

7    with Allied followed the same pattern, but he did not then inform

8    Allied of the regulatory change in Israel which might have

9    invoked Paragraph 8.A.

10             Poly Systems and Allied consequently became involved in

11   "a dispute around Poly Systems not taking the material on the

12   schedule that it was required to under the original agreement."

13   Test. of Anne Madden, Trial Tr. 858:18-21, June 29, 2005.     To

14   resolve the dispute, Allied and Poly Systems amended the Allied

15   Contract effective December 1, 1997 ("First Amended Allied

16   Contract").   Under the First Amended Allied Contract, Poly

17   Systems was required to order the remaining Allied CFC-113 by

18   December 15, 1997, but Allied was required to continue storing it

19   through December 31, 1998.   Allied also agreed to extend Poly

20   Systems's territorial exclusivity in the Middle East until

21   December 31, 1999, if Poly Systems took possession of the Allied

22   CFC-113 by December 31, 1998.   The amendment incorporated all

23   other consistent terms of the original October 1995 contract.

24             The amendment to the Allied Contract did not solve

25   Shellef's biggest problem:   The government of Israel, his best

26   customer, was no longer importing CFC-113.   Shellef did have

                                     12
1    other willing buyers of CFC-113 -- Custom and All Discount, which

2    began buying Elf CFC-113 in mid-1997 -- but the First Amended

3    Allied Contract prohibited Shellef from selling Allied CFC-113 to

4    them.   Still, knowing that Rubenstein did not have enough Elf

5    CFC-113 to fill the Custom and All Discount orders, Shellef

6    negotiated another amendment to the Allied Contract on

7    February 10, 1998, effective January 7, 1998 ("Second Amended

8    Allied Contract").    Poly Systems now was required to purchase and

9    take possession of the remaining Allied CFC-113 -- 493,000

10   pounds -- by June 30, 1998, but the price was reduced from $3.75

11   to $3.55 per pound.   Shellef rejected Allied's offer to terminate

12   the contract if the Israeli government informed him that it would

13   not order CFC-113 in 1998.   The Second Amended Allied Contract

14   stated that "from and after June 30, 1998, all price, volume, and

15   other terms and conditions of sale of [CFC-113] by [Allied] to

16   [Poly Systems] under the Contract shall not be as set forth in

17   the Contract, but shall be as negotiated by the parties from time

18   to time from and after June 30, 1998."   Second Amended Allied

19   Contract, at 1 ¶ 1.

20              On June 3, 1998, Shellef sent his contact at Allied,

21   Albert "Lou" Dorsey, a letter stating that Israel had adopted a

22   law generally prohibiting CFC importation.   The letter asserted,

23   though, that there might be an exception for "previous importers"

24   and that Shellef was negotiating with such an entity.    Letter

25   from Shellef to Dorsey dated June 3, 1998.   He suggested that

26   pending the outcome of those negotiations, a) Poly Systems would

                                      13
1    place orders with Allied before June 30 at the contract price; b)

2    Poly Systems would buy at the regular market price after June 30;

3    and c) Allied should "exercise reasonable commercial efforts" to

4    sell the remaining CFC-113 in accordance with Paragraph 8.A of

5    the original contract.    Id.; Allied Contract at 3 ¶ 8.A.   Allied

6    pressed Shellef to purchase all the remaining CFC-113 under the

7    agreement and questioned the nature of the governmental

8    regulation that would allow Shellef to invoke Paragraph 8.A.

9    Shellef responded on June 19 by sending Allied a copy of a letter

10   dated March 15, 1998, from an Israeli governmental official to

11   Shellef's lawyer.    It stated:   "In principle, according to the

12   Vienna Convention, Montreal Protocol, the import [sic] of . . .

13   CFC-113 is prohibited."    Test. of Lou Dorsey, Trial Tr. 711:17-

14   19, June 28, 2005.

15             On October 5, 1998, Shellef offered to purchase all of

16   the remaining Allied CFC-113 at a rate of one truckload per

17   month, if Allied reduced the price to $1.60 per pound and

18   continued his exclusive rights in the Middle East.     Shellef told

19   an Allied lawyer that "a window had opened up [in Israel] and he

20   would be able to move some material at a lower price."     Test. of

21   Anne Madden, Trial Tr. 883:17-18, June 29, 2005.     Allied and

22   Shellef agreed on a price of $1.75 per pound and, with other

23   changes not relevant here, agreed that the "other terms and

24   conditions of the Agreement, except to the extent they are

25   inconsistent with the above provisions shall continue in full



                                       14
1    force and effect."   Letter from Dorsey to Shellef dated Oct. 28,

2    1998 (the "Autumn 1998 Agreement").7

3              Sometime after the February 1998 amendment became

4    effective, but probably before June 1998, Custom stopped buying

5    CFC-113 from Shellef.   But during and after the course of the

6    contractual dispute and subsequent negotiations, Shellef began

7    selling Allied CFC-113 to All Discount, making two shipments in

8    September 1998.   Shellef asked Rubenstein to ship the Allied CFC-

9    113 out of the Bayonne warehouse in which it had previously been

10   stored, to remove any references to Allied on the drums, and to

11   label the virgin Allied CFC-113 falsely as "reclaimed 113."8


          7
            Shellef strenuously contests whether the territorial
     restrictions on him contained in the original contract remained
     in effect. On his reading, the Autumn 1998 Agreement did not
     incorporate the original contract terms limiting sales to the
     original market. Shellef testified at trial that he believed
     that, pursuant to the Second Amended Allied Agreement, the
     limitation to export sales expired on June 30, 1998, and was not
     revived by the Autumn 1998 Agreement. The Autumn 1998 Agreement
     made reference to the original contract "as amended," and the
     Second Amended Allied Agreement specified that the "terms and
     conditions of sale[s]" made after June 30, 1998, "shall not be as
     set forth in the Contract, but shall be negotiated by the
     parties." But it also said that Allied "agrees to extend
     [Shellef's] exclusive rights to sell [CFC-113] in the [Middle
     East] through the end of 1999." Allied representatives similarly
     testified that they understood the new agreement to incorporate
     the export obligation from the previous agreement.
          8
            At trial, evidence was presented to the effect that the
     re-labeling of materials was a common service rendered at the
     behest of the product distributor, who did not want the final
     purchaser to know where the product was manufactured for fear
     that the purchaser would bypass the distributor and buy the
     product directly from the manufacturer. Although this practice
     of "customer protection" might explain the removal of Allied
     labels, it is unclear why it should also be viewed as necessary
     for such purposes to change the designation from "virgin" to
     "reclaimed." The defendants may have thought that the Elf CFC-

                                     15
1    From October through December 1998, Shellef made four more

2    shipments of Allied CFC-113 to All Discount.

3              In early 1999, Shellef began storing Allied CFC-113

4    with Five Star Enterprises ("Five Star"), a consignee freight

5    forwarder in California.   Shellef directed Five Star to follow

6    instructions given by Rubenstein.      On March 12, 1999,

7    Rubenstein's employee, at Shellef's direction, shipped thirty-six

8    drums of the Allied CFC-113 from Rubenstein's New Jersey

9    warehouse to Five Star's California warehouse.      Five Star then

10   made periodic shipments of the Allied CFC-113 to All Discount

11   when instructed to do so by Shellef.      Other shipments of Allied

12   CFC-113, including sixty drums on February 7, 2000, were also

13   made to Five Star for distribution to All Discount.

14             Beginning on March 9, 2000, Shellef also sold Allied

15   CFC-113 to Mid-Atlantic Chemical, Inc. ("Mid-Atlantic"), a

16   Pennsylvania-based domestic distributor of CFC-113.      Shellef told

17   the president of Mid-Atlantic that excise taxes "had been taken

18   care of" on the Allied CFC-113.    Test. of Theodore Stepanoff,

19   Trial Tr. 1250:9-14, June 29, 2005.      Mid-Atlantic's first

20   purchase of Allied CFC-113 from Shellef was resold by Mid-

21   Atlantic to EM Science in Ohio.

22             In April 2000, Shellef contacted EM Science directly to

23   offer ten drums of Allied CFC-113 "left over from a project in

24   California."   Test. of Ronald Wizda, Trial Tr. 523-24, June 27,


     113 was "reclaimed," but there is no evidence that they thought
     the Allied CFC-113 to be anything but virgin.

                                       16
1    2005.   Shellef offered it at a tax-paid price.   EM Science wanted

2    to test the quality of Shellef's product before placing an order.

3    On May 18, 2000, Shellef directed Rubenstein to ship one drum of

4    Allied CFC-113 to EM Science, but to make sure to remove a label

5    falsely indicating that it was reclaimed and attach instead a

6    label correctly indicating that the product was virgin CFC-113

7    produced by Allied.   EM Science decided to satisfy its additional

8    CFC-113 requirements through Mid-Atlantic, not through Shellef.

9               Shellef sold Allied CFC-113 on the domestic market each

10   year from 1998 through 2000, with the applicable but unpaid

11   excise tax rate varying from year to year.    All told, Shellef

12   sold 30,360 pounds of Allied CFC-113 domestically in 1998; the

13   excise tax due on these sales totaled $162,729.60.    In 1999,

14   Shellef sold 198,580 pounds domestically, resulting in an unpaid

15   excise tax in the amount of $1,135,877.60.    Finally, in 2000,

16   Shellef's domestic sales of 73,252 pounds of CFC-113 required a

17   total excise-tax payment of $445,372.16 that was never paid.

18   Shellef never sent Allied any documentation regarding any of the

19   domestic sales of its product.

20              1996 Tax Charges

21              Two of the tax charges concern filings with the IRS for

22   the year 1996 -- Shellef's personal return and the PolyTuff USA

23   corporate return filed by Shellef.    Shellef had hired an

24   accountant, Stephen Stein, to prepare corporate tax returns for

25   Poly Systems, Poly Systems USA, and PolyTuff USA for that year.

26   Stein had also prepared Shellef's personal income tax returns.

                                      17
1    Shellef gave Stein copies of "Quicken" records9 that Shellef

2    kept, but he never gave Stein original invoices or similar backup

3    documents to substantiate the information contained in the

4    Quicken documents.

5                For PolyTuff USA's 1996 fiscal year, which ended on

6    February 28, 1997, Shellef's Quicken records, and the PolyTuff

7    USA tax return prepared by Stein, revealed gross receipts10 of

8    $633,639.    After expenses, this amounted to a taxable income of

9    $10,547.    Stein reconciled the 1996 PolyTuff USA Quicken

10   information with records from checking and money market accounts

11   PolyTuff USA held at First Bank of the Americas.    But Shellef did

12   not inform Stein of a PolyTuff USA account held at Marine Midland

13   Bank in which PolyTuff USA had deposited four checks in the total

14   amount of $1,942,113.62 during fiscal year 1996.    The reported

15   gross receipts therefore understated actual gross receipts by

16   nearly $2 million.    After accounting for unreported expenses,

17   PolyTuff USA owed $288,621.58 in taxes for 1996, instead of the

18   $1,582 it claimed to owe on its return.




          9
             "Quicken" is the name given by Intuit Inc. to its widely
     used group of financial computer programs for consumer and
     business use. They are used, among other things, to keep
     financial records, including check registers. See Test. of
     Stephen Stein, Trial Tr. 1467:12-20, July 6, 2005; Intuit,
     http://www.intuit.com (last visited July 21, 2007).
          10
            This amount is calculated by adding the cash received in
     a fiscal year to the accounts receivable at the end of that year
     and then subtracting the accounts receivable that were reported
     in the prior year and collected in the current year.

                                      18
1                Shellef's personal income tax return for 1996, also

2    prepared by Stein, reported total income of $77,446 and taxable

3    income of $53,996.    But Shellef hid personal bank accounts from

4    Stein.   Because of undisclosed transactions involving these

5    accounts and PolyTuff USA, Shellef's taxable income for 1996 in

6    fact was $957,326 -- $903,330 more than the $53,996 Shellef

7    reported.    Shellef owed $344,152 more in personal income tax for

8    1996 than the $9,900 he had reported and paid.

9                1999 Tax Charge

10               By 1998, Shellef was working with a different

11   accountant at Stein's firm -- Stephen Kashinsky.    Kashinsky

12   prepared Poly Systems's original 1999 corporate tax return.

13   Based on the Quicken records and bank statements that Shellef

14   gave him, Kashinsky reported gross receipts of $986,224.

15               But Shellef did not tell Kashinsky about accounts held

16   by Poly Systems at North Fork Bank ("North Fork") and Commercial

17   Bank of New York ("CBNY").    In 1999, All Discount paid Poly

18   Systems $662,400 for Allied CFC-113, which it transferred by wire

19   into the undisclosed Poly Systems account at CBNY.    Poly Systems

20   also deposited two checks in the total amount of $120,216 into

21   its undisclosed North Fork account.    Poly Systems's 1999

22   corporate tax return thus under-reported gross receipts by

23   $782,616.    When Shellef became aware of an FBI investigation of

24   his business affairs, he replaced Kashinsky with Michael

25   Maddaloni, who had been preparing Poly Systems USA's filings

26   since Rubenstein made his investment in that company.    Shellef

                                      19
1    filed an amended return for Poly Systems that added $760,701 to

2    the original return's report of $986,224 in gross receipts,

3    $21,915 less than the $782,616 he had failed to report.

4                Shellef also withheld information from Kashinsky about

5    personal foreign bank accounts -- one at Credit Suisse in

6    Switzerland and the other at Bank Leumi in Israel.     He conducted

7    three wire transfers in the total amount of $450,240 out of Poly

8    Systems's CBNY account and into the Credit Suisse and Bank Leumi

9    accounts.    The original return did not reflect these

10   transactions.    The amended return showed most of these transfers

11   as loans from Poly Systems to Shellef.     Shellef repaid the loans

12   with interest.

13               The Indictment

14               On June 24, 2003, a grand jury in the United States

15   District Court for the Eastern District of New York returned a

16   ninety-one count indictment against Shellef and a forty-six count

17   indictment against Rubenstein.     Count One charges them jointly

18   with conspiring to impede the IRS's collection of excise taxes in

19   violation of 18 U.S.C. § 371, based on their domestic sales of

20   Elf and Allied CFC-113.      Shellef and Rubenstein were also charged

21   jointly in Counts Five through Fifty with wire fraud, in

22   violation of 18 U.S.C. § 1343.     Those counts rested on two

23   alternative theories of fraud based on Shellef's alleged promise

24   to export all the Allied CFC-113: 1) absent Shellef's alleged

25   misrepresentation about the CFC-113's destination, Allied would

26   have charged Poly Systems for the excise tax due on domestic

                                        20
1    sales of virgin CFC-113; and 2) absent the alleged

2    misrepresentation, Allied would not have sold Shellef the CFC-

3    113.   Rubenstein's alleged role in the wire fraud was to store,

4    re-label, and ship the Allied CFC-113 to domestic customers at

5    Shellef's direction.    Shellef and Rubenstein allegedly used wire

6    communications to transmit shipping instructions, invoices, and

7    payments they received for domestic sales as part of their plan.

8               The remainder of the counts in the indictment charge

9    only Shellef.   Count Two alleges that Shellef violated 26 U.S.C.

10   § 7206(1) by subscribing to false statements regarding the gross

11   receipts reported in PolyTuff USA's 1996 tax return.   Count Three

12   alleges that Shellef evaded personal income taxes for 1996 by

13   understating his taxable income and the tax due, a violation of

14   26 U.S.C. § 7201.   Count Four charges Shellef with another

15   violation of section 7206(1), this one arising out of the alleged

16   understatement of Poly Systems's gross receipts on its 1999

17   corporate tax return.

18              In addition to these tax charges, Shellef was indicted

19   on forty-one counts of money laundering, based on his actions

20   underlying the conspiracy and wire fraud counts.   The first five,

21   Counts Fifty-One through Fifty-Five, allege violations of 18

22   U.S.C. § 1956(a)(1)(A)(i) arising out of Shellef's use of

23   proceeds from domestic sales of CFC-113 to buy more Allied CFC-

24   113.   Counts Fifty-Six through Ninety-One allege violations of 18

25   U.S.C. §§ 1956(a)(1)(A)(ii) and (B)(i), arising out of Shellef's



                                      21
1    transfer of proceeds from domestic CFC-113 sales to U.S. and

2    foreign bank accounts.

3                District Court Proceedings

4                Prior to trial, Shellef moved to dismiss the

5    conspiracy, wire fraud, and 1999 tax counts for failure to allege

6    offenses and to sever all tax counts from the other counts under

7    Rule 8 of the Federal Rules of Criminal Procedure.11    Rubenstein

8    joined in seeking the relief sought by Shellef.     The district

9    court denied the motions.

10               The trial began on June 20, 2005.   The government's

11   evidence supporting the conspiracy and wire fraud charges -- and,

12   by extension, the money laundering charges based on the

13   conspiracy and wire fraud counts -- came principally from two

14   witnesses, Allied's Albert Dorsey and Anne Madden.     They

15   testified, inter alia, that Shellef obligated himself in the

16   Autumn 1998 Agreement to continue to confine himself to export

17   sales.    Shellef's defense to these charges rested in large part

18   on his assertion that he did not, under the Autumn 1998 Agreement

19   or otherwise, undertake to export the Allied CFC-113 after the

20   original contract expired on June 30, 1998.




          11
            We note that Shellef argued in the district court that
     all the tax charges should be severed from all the non-tax
     charges but he argues on appeal that the 1996 tax charges were
     misjoined with the remaining charges, including the 1999 tax
     charge. The government does not, however, contend that Shellef's
     argument on appeal was waived, and so we consider it as argued
     and briefed before us.

                                      22
1               Although most of the trial explored Shellef's and

2    Rubenstein's dealings with Elf and Allied, substantial portions

3    related to the 1996 personal tax evasion and false return charges

4    against Shellef.    Indeed, roughly half of the government's cross-

5    examination of Shellef focused on the 1996 tax evasion and false

6    return charges.

7               On July 28, 2005, the jury returned general verdicts of

8    guilty against both defendants on all counts of which each was

9    charged.   The district court thereafter sentenced Shellef

10   principally to seventy months' imprisonment and three years of

11   supervised release.    The district court sentenced Rubenstein

12   principally to eighteen months' imprisonment and three years of

13   supervised release.    Shellef and Rubenstein were ordered to pay

14   $1,880,461 in restitution.     The district court also entered a

15   final order of forfeiture requiring Shellef to forfeit

16   $1,350,650.

17              This appeal followed.    By Order of this Court dated

18   December 19, 2006, the district court released the defendants on

19   bond pending appeal.

20                                  DISCUSSION

21              I.   Jurisdiction

22              The district court had jurisdiction over the

23   prosecution of Shellef and Rubenstein pursuant to 18 U.S.C.

24   § 3231 because they were charged with violating federal criminal

25   laws.   The district court entered judgments of conviction against

26   Rubenstein in March 2006 and against Shellef in April 2006.      We

                                        23
1    have jurisdiction over the appeal of such final judgments under

2    28 U.S.C. § 1291.

3              II.   Basis for Vacatur and Remand

4              The defendants argue that the 1996 tax evasion and

5    false return counts against Shellef were improperly joined with

6    the remainder of the counts in the indictment.   The government

7    defends the joinder on the ground that "the charges were 'based

8    on the same act or transaction' as the other charges the jury was

9    to consider."   Gov't Br. at 51.

10             We review the propriety of joinder de novo.     United

11   States v. Feyrer, 333 F.3d 110, 113 (2d Cir. 2003).     "[T]he

12   propriety of Rule 8 joinder is subject to full appellate review,

13   and where joinder should not have been permitted, a conviction

14   must be reversed, unless failure to sever was harmless error."

15   United States v. Attanasio, 870 F.2d 809, 815 (2d Cir. 1989)

16   (internal quotation marks and citations omitted).

17             Federal Rule of Criminal Procedure 8 sets forth when

18   joinder is appropriate in criminal cases:

19             Joinder of Offenses or Defendants

20             (a) Joinder of Offenses. The indictment or
21             information may charge a defendant in
22             separate counts with 2 or more offenses if
23             the offenses charged -- whether felonies or
24             misdemeanors or both -- are of the same or
25             similar character, or are based on the same
26             act or transaction, or are connected with or
27             constitute parts of a common scheme or plan.

28             (b) Joinder of Defendants. The indictment or
29             information may charge 2 or more defendants
30             if they are alleged to have participated in
31             the same act or transaction, or in the same

                                        24
1              series of acts or transactions, constituting
2              an offense or offenses. The defendants may
3              be charged in one or more counts together or
4              separately. All defendants need not be
5              charged in each count.

6    Fed R. Crim. P. 8.   Thus, while Rule 8(a) allows joinder of

7    offenses that are of "the same or similar character," Rule 8(b)

8    does not allow joinder of defendants on that basis alone -- they

9    must be "alleged to have participated in the same act or

10   transaction, or in the same series of acts or transactions."    Id.

11             The parties devote considerable attention to the

12   question whether Rule 8(a) or Rule 8(b) applies when a defendant

13   in a multi-defendant, multi-count prosecution such as the one

14   against Shellef challenges the joinder of a count in which he is

15   the only defendant charged.12   But the government explicitly

16   defends both the joinder under Rule 8(a) of the charges against



          12
            Indeed, the answer to this question is not well-settled.
     Compare United States v. Turoff, 853 F.2d 1037, 1043 (2d Cir.
     1988) (stating that "our cases indicate that when a defendant in
     a multiple-defendant case challenges joinder of offenses, his
     motion is made under 8(b) rather than 8(a)") (internal quotation
     marks omitted) (citing cases) and Attanasio, 870 F.2d at 814-15
     (applying Rule 8(b) to determine whether two conspiracies should
     have been charged together) with United States v. Biaggi, 909
     F.2d 662, 675-76 (2d Cir. 1990) (citation omitted) (acknowledging
     the "thoughtful opinion" of the district court, which limited the
     reach of Turoff on the ground that it "should be understood to
     apply Rule 8(b) standards to the claim of a defendant in a multi-
     defendant trial only when he seeks severance of counts in which
     he and at least one of his co-defendants are charged," while
     leaving open the possibility "that Rule 8(a) standards apply to a
     defendant in a multi-defendant trial who seeks severance of
     counts in which he is the only defendant charged," but failing to
     resolve the issue because joinder was also proper under Rule
     8(b)). We, likewise, need not opine on the reach of Turoff here
     because our resolution of this appeal is the same even if Rule
     8(a), the more expansive joinder provision, applies.

                                      25
1    Shellef and the joinder under Rule 8(b) of defendants only on the

2    grounds that the 1996 tax charges "are 'based on the same act or

3    transaction' as the other charges the jury was to consider."

4    Gov't Br. at 51.   It further asserts that all of the charges

5    "share a common nucleus, the sale of the CFC-113."   Gov't Br. at

6    51.   The government thus appears also to rely for joinder of

7    offenses under Rule 8(a) on the grounds that the charged offenses

8    "are connected with or constitute parts of a common scheme or

9    plan," Fed. R. Crim. P. 8(a), and for joinder of defendants under

10   Rule 8(b) on the parallel grounds that the defendants

11   "participated . . . in the same series of acts or transactions,

12   constituting an offense or offenses," Fed. R. Crim. P. 8(b).    Cf.

13   United States v. Halper, 590 F.2d 422, 430 (2d Cir. 1978)

14   (justifying joinder under the "common scheme or plan" clause

15   because it saves the government from having to "prov[e] what is

16   essentially the same set of facts more than once" and the

17   defendant from "defending more than once against what are

18   essentially the same, or at least connected, charges").

19              Critically, the government does not defend the joinder

20   of offenses under Rule 8(a)'s "same or similar character" clause.

21   See United States v. Turoff, 853 F.2d 1037, 1042-43 (2d Cir.

22   1988) (concluding that Rule "8(b) provides a more restrictive

23   test" because "[u]nlike Rule 8(a), Rule 8(b) does not permit

24   joinder . . . solely on the ground that the offenses charged are

25   of 'the same or similar character'").   If, then, the charges

26   against Shellef alone are not "based on the same act or

                                     26
1    transaction" or "are [not] connected with or constitute parts of

2    a common scheme or plan," Fed. R. Crim. P. 8(a), and the charges

3    against both Shellef and Rubenstein are not based on "the same

4    act or transaction, or [o]n the same series of acts or

5    transactions," Fed. R. Crim. P. 8(b), both the joinder of charges

6    and the joinder of defendants were improper.

7    A.   Joinder of Charges against Shellef

8               1.   Propriety of Joinder.    There are three tax charges

9    against Shellef.    Two of them arise from Shellef's 1996 tax

10   returns (the "1996 Tax Counts").      First, Shellef is charged with

11   falsely reporting the gross receipts on PolyTuff USA's 1996

12   corporate income tax return (the "PolyTuff Tax Count").     Second,

13   he is charged with misstating his taxable income on his 1996

14   personal income tax return (the "Personal Tax Count").     Third, he

15   is charged with falsely reporting gross receipts on Poly

16   Systems's corporate income tax return in 1999 (the "1999 Tax

17   Count" or the "Poly Systems Tax Count").     As noted, these tax

18   counts are joined with several non-tax counts charging both

19   Shellef and Rubenstein with conspiracy and wire fraud and

20   charging Shellef alone with money laundering.     Shellef contends

21   that the 1996 Tax Counts should not have been joined with the

22   remaining counts, including the 1999 Tax Count.

23              We apply a "commonsense rule" to decide whether, in

24   light of the factual overlap among charges, joint proceedings

25   would produce sufficient efficiencies such that joinder is proper

26   notwithstanding the possibility of prejudice to either or both of

                                      27
1    the defendants resulting from the joinder.     See Turoff, 853 F.2d

2    at 1044 ("applying a commonsense rule to these facts" to

3    determine whether "a reasonable person would easily recognize the

4    common factual elements that permit joinder"); see also id. at

5    1042 (recognizing that the tests for joinder "reflect[] a policy

6    determination that [in some circumstances,] gains in trial

7    efficiency outweigh the recognized prejudice that accrues to the

8    accused").   For example, counts might be "connected" if one of

9    the offenses "depend[s] upon []or necessarily l[eads] to the

10   commission of the other," or if proof of one act "constitute[s]

11   []or depend[s] upon proof of the other."     Halper, 590 F.2d at

12   429.

13              "Tax counts may be joined with non-tax counts where it

14   is shown that the tax offenses arose directly from the other

15   offenses charged."    Turoff, 853 F.2d at 1043.   "The most direct

16   link possible between non-tax crimes and tax fraud is that funds

17   derived from non-tax violations either are or produce the

18   unreported income."   Id.   Thus, if a defendant is charged with

19   fraud, the government may prosecute the defendant for fraud and

20   for not paying taxes on the profits produced by the alleged fraud

21   jointly.   And "if the character of the funds derived do not

22   convince us of the benefit of joining these two schemes in one

23   indictment, other overlapping facts or issues may."     Id. at 1043-

24   44.

25              Here, the Personal Tax Count and the PolyTuff Tax Count

26   against Shellef might have been properly joined with an

                                      28
1    indictment charging the 1999 Tax Count because there are common

2    facts concerning Shellef's relationship with Stein and

3    Kashinsky's accounting firm, which handled both his 1996 and 1999

4    tax returns.   And inasmuch as the schemes underlying the non-tax

5    counts against Shellef and Rubenstein generated the allegedly

6    unreported 1999 income of Poly Systems that formed the basis for

7    the 1999 Tax Count against Shellef, it seems likely that the 1999

8    Tax Count against Shellef could have been properly joined with an

9    indictment charging only the conspiracy, wire fraud, and money

10   laundering schemes against Shellef -- the unreported 1999 income

11   was produced by those schemes.   See United States v. Biaggi, 909

12   F.2d 662, 676 (2d Cir. 1990) (holding that tax counts were

13   properly joined with conspiracy counts because most of the

14   unreported income was produced by the conspiracy).

15             The funds generated by the wire fraud, money

16   laundering, and conspiracy schemes, however, were unrelated to

17   the unreported income that was the basis for the 1996 Tax Counts.

18   Indeed, the alleged 1996 tax violations took place before the

19   conspiracy and wire fraud allegedly began.   The government's

20   contention that all the charges "share a common nucleus, the sale

21   of the CFC-113," Gov't Br. at 51, paints the allegations with too

22   broad a brush.   Even assuming that PolyTuff USA's unreported

23   gross receipts and Shellef's unreported personal income derived

24   entirely from CFC-113 sales (a fact about which the record is

25   silent), the fact that the businesses that produced the 1996

26   unreported income were also subsequently used to perpetrate the

                                      29
1    alleged conspiracy and wire fraud does not justify a conclusion

2    that the offenses charged are "based on the same act or

3    transaction, or are connected with or constitute parts of a

4    common scheme or plan" under Rule 8(a).   Fed R. Crim. P. 8(a);

5    see also Halper, 590 F.2d at 429 (rejecting the joinder of income

6    tax counts with Medicaid fraud counts, even though the unreported

7    income was generated by the same business that allegedly

8    committed the Medicaid fraud, because the unreported income may

9    have been produced by legitimate activities of the business

10   unrelated to the fraud).

11              We can find no other link between the 1996 Tax Counts

12   and the other charges sufficient to justify joinder of all of the

13   counts.   The gravamen of the government's case with respect to

14   the wire fraud, money laundering, conspiracy, and 1999 tax

15   offenses is that Shellef and Rubenstein conspired to obstruct the

16   IRS's collection of the excise tax due on their sales of CFC-113

17   by misrepresenting to Allied and Elf their intent to resell the

18   product abroad.   The only common factual elements between those

19   charges and the 1996 Tax Counts is that Shellef purchased CFC-113

20   from Allied and that Shellef used Stein and Kashinsky's

21   accounting firm from 1996 through 1999.   Elements of the 1996 Tax

22   Counts that are not common to the conspiracy, wire fraud, money

23   laundering, and 1999 tax counts include that Shellef made sales

24   to the government of Israel in 1996; that PolyTuff USA deposited

25   these funds in an undisclosed Marine Midland account; that

26   Shellef held an undisclosed personal account at Citibank to which

                                     30
1    he diverted corporate profits; and that he omitted the funds from

2    his tax returns.   Elements of the conspiracy, wire fraud, money

3    laundering, and 1999 tax counts that are not common to the 1996

4    Tax Counts include that the Israeli government ceased importing

5    CFC-113 in 1997; that Shellef renegotiated his contract with

6    Allied on more than one occasion; that Rubenstein purchased CFC-

7    113 from Elf; that Shellef and Rubenstein sold CFC-113

8    domestically; and that they misrepresented to their domestic

9    buyers that the excise tax had been paid.

10             Requiring that the 1996 Tax Counts be tried separately

11   from the remaining counts, moreover, would not require that the

12   government "prov[e] what is essentially the same set of facts

13   more than once" and Shellef to "defend[] more than once against

14   what are essentially the same, or at least connected, charges."

15   Halper, 590 F.2d at 430.   Because "[c]ommission of [the alleged

16   wire fraud and conspiracy] neither depended upon nor necessarily

17   led to the commission of" the alleged 1996 tax misconduct and

18   "proof of the one act neither constituted nor depended upon proof

19   of the other," joinder was improper.    Id. at 429.

20             The charges are thus not "based on the same act or

21   transaction, [and] are [not] connected with [and do not]

22   constitute parts of a common scheme or plan" under Rule 8(a).

23   Cf. Biaggi, 909 F.2d at 676 ("Proof of one scheme was helpful to

24   a full understanding of the other.").   Although the 1996 Tax

25   Counts may be relevant to determining whether Shellef possessed

26   the requisite mens rea for the 1999 Tax Count, the 1996 Tax

                                     31
1    Counts and the non-tax counts are not sufficiently "unified by

2    some substantial identity of facts or participants," nor do they

3    "arise out of a common plan or scheme."   Attanasio, 870 F.2d at

4    815 (quoting United States v. Porter, 821 F.2d 968, 972 (4th Cir.

5    1987), cert. denied, 485 U.S. 934 (1988)) (finding joinder

6    appropriate where two contemporaneous conspiracies "shared a

7    common purpose" and included "an overlap of participants and

8    acts").

9              We do not think, then, that the 1999 Tax Count -- which

10   might have been joined with either the 1996 Tax Counts or the

11   conspiracy, wire fraud, and money laundering counts -- provides

12   an adequate link between the 1996 Tax Counts and the non-tax

13   counts to justify joinder of all the charges against Shellef.

14   The 1996 Tax Counts therefore should not have been joined with

15   the remaining counts.13


          13
            In Biaggi, multiple defendants were involved in a large-
     scale conspiracy to extort money from a company called Wedtech.
     See Biaggi, 909 F.2d at 670-74. One defendant was also charged
     with extorting money from a contractor named Fogliano. See id. at
     673. This defendant was further charged with a tax violation for
     unreported income. See id. at 675. We reasoned that because the
     overwhelming majority of the unreported income was derived from
     the Wedtech extortion that was at the center of the trial,
     joinder was proper notwithstanding that a small amount of the
     income was from the unrelated Fogliano extortion. See id. at
     676. Nonetheless, we noted hypothetically that if the trial had
     focused on the Fogliano extortion, joinder of a tax count based
     largely on unreported Wedtech extortion income may be improper,
     even if it included a small amount of Fogliano extortion income.
     See id. Biaggi thus reinforced the notion that the propriety of
     joining tax charges with non-tax charges depends in large part on
     whether the unreported income forming the basis for the tax
     charges was derived from the criminal acts that form the basis
     for the non-tax charges.


                                    32
1                2.    Harmlessness of Misjoinder as to Shellef.

2    Erroneous joinder "requires reversal only if the misjoinder

3    results in actual prejudice because it 'had substantial and

4    injurious effect or influence in determining the jury's

5    verdict.'"       United States v. Lane, 474 U.S. 438, 449 (1986)

6    (quoting Kotteakos v. United States, 328 U.S. 750, 776 (1946));

7    see also id. at 450 (concluding that the error in that case was

8    harmless because the evidence of guilt was overwhelming, limiting

9    instructions were given, and the evidence on the misjoined count

10   would have been admissible in a trial on the remaining counts).

11   In determining whether the error was harmless, we inquire whether

12   "evidence tending to prove the charge that should have been

13   severed would nevertheless have been admissible at the trial of

14   the objecting []defendant, and was admitted subject to

15   appropriate limiting instructions."       Attanasio, 870 F.2d at 815

16   (quoting United States v. Turbide, 558 F.2d 1053, 1061 (2d Cir.),

17   cert. denied, 434 U.S. 934 (1977)) (internal quotation marks

18   omitted).    "The burden of establishing harmlessness is on the

19   government."       United States v. Quattrone, 441 F.3d 153, 181 (2d

20   Cir. 2006).      We must examine whether the misjoinder was harmless

21   with respect to the jury's conviction of Shellef on each count.



          Shellef's case stands even further outside Rule 8's scope
     than the hypothetical posed by the Biaggi Court. Here, none of
     the unreported personal or corporate income was derived from the
     conspiracy or wire fraud schemes that formed the basis for the
     other charges against Shellef and Rubenstein. There is simply no
     meaningful factual overlap between the 1996 Tax Counts and the
     remainder of the case.

                                         33
1              a. The non-tax counts

2              We conclude that misjoinder of the tax and non-tax

3    counts was not harmless with respect to Shellef's convictions on

4    the non-tax counts.   Had Shellef been tried on only the non-tax

5    counts and the 1999 Tax Count, some of the evidence related to

6    the 1996 Tax Counts might have been admissible for the limited

7    purpose of establishing Shellef's mental state with respect to

8    the 1999 Tax Count.   See United States v. Bok, 156 F.3d 157, 165

9    (2d Cir. 1998) ("[W]e have often explained [that] a defendant's

10   past taxpaying record is admissible to prove willfulness

11   circumstantially."); cf. Fed. R. Evid. 404(b) ("Evidence of other

12   crimes, wrongs, or acts" may be admissible to prove, inter alia,

13   "intent, . . . knowledge, . . . or absence of mistake or

14   accident . . . .").

15             But other-acts evidence admissible under Rule 404(b) is

16   subject to exclusion under Rule 403, which provides that evidence

17   "may be excluded if its probative value is substantially

18   outweighed by the danger of unfair prejudice."    Fed. R. Evid.

19   403; see also United States v. Myerson, 18 F.3d 153, 166 (2d Cir.

20   1994) (recognizing that "[r]elevant evidence of a defendant's

21   prior bad acts [may be] admissible under Rule 404(b) . . . so

22   long as that evidence is not substantially more prejudicial than

23   probative under Rule 403").   We think that the risk of unfair

24   prejudice would have been excessive if evidence of the 1996 Tax

25   Counts were to have been admitted in a trial on the non-tax

26   counts and the 1999 Tax Count.    A danger generally associated

                                       34
1    with other-acts evidence is that the jury will understand it to

2    suggest that the defendant is predisposed to engage in a

3    particular type of criminal activity.   See Fed. R. Evid. 404(b)

4    (providing that other-acts evidence "is not admissible to prove

5    the character of a person in order to show action in conformity

6    therewith").   In this case, there are at least two concerns about

7    the other-acts evidence that would warrant its exclusion.   First,

8    there is the danger that the jury may improperly apply the other-

9    acts evidence to the non-tax counts even though it is admissible

10   only as to the 1999 Tax Count.   The risk is that the jury would

11   reason that if Shellef was willing to lie to the IRS in 1996, he

12   would be willing subsequently to lie to others, including Allied

13   and Elf personnel.   Second, because here the other-acts evidence

14   relates to Shellef's alleged deceit, there is an additional risk:

15   The jury might have interpreted the 1996 Tax Counts evidence as

16   an indication of Shellef's general mendacity relevant to the

17   remaining counts and thereby discount his testimony unrelated to

18   the tax counts.

19              Perhaps, as in Attanasio, an instruction strictly

20   limiting the jury's use of the evidence admitted as to the 1996

21   Tax Counts to that which is permissible -- to negate the

22   inference that the misstated gross receipts on the 1999 Poly

23   Systems return were the product of mere mistake -- would have

24   helped cure the prejudice.   But no such instruction was given

25   here.   See Attanasio, 870 F.2d at 815 (noting that the district

26   judge "gave appropriate limiting instructions to the jury" to

                                      35
1    narrow evidence admitted under Rule 404(b) to the defendant's

2    intent and motive).    Since no limiting instruction was given, the

3    evidence as to the 1996 Tax Counts would not have been admissible

4    in a trial on all the other counts.    We therefore conclude that

5    the misjoinder of the 1996 Tax Counts was not harmless error as

6    to the non-tax counts.

7              b. The 1996 Tax Counts

8              Prejudicial misjoinder of the charges is, in this case,

9    a two-way street.    Just as the introduction of evidence as to

10   elements of the 1996 Tax Counts was prejudicial to jury

11   deliberation on the conspiracy, wire fraud, and money laundering

12   counts, introduction of evidence as to elements of the

13   conspiracy, wire fraud, and money laundering counts was

14   prejudicial to jury deliberation on the 1996 Tax Counts.    After

15   hearing evidence of the conspiracy, wire fraud, and money

16   laundering counts, the jury may have thought that Shellef was

17   predisposed to commit crimes of deceit like those alleged in the

18   1996 Tax Counts.    No limiting instruction was given that would

19   have been adequate to protect against these risks.    See

20   Attanasio, 870 F.2d at 815.

21             c. 1999 Tax Count

22             We conclude, finally on this score, that because of the

23   misjoinder, the jury's conviction of Shellef on the 1999 Tax

24   Count also cannot stand.    Although evidence relating to the 1996

25   Tax Counts and the non-tax counts is admissible as to the 1999

26   Tax Count, a limiting instruction was required to prevent the

                                      36
1    jury from improperly considering such evidence as demonstrating

2    Shellef's propensity to commit crimes of deceit.     See Bok, 156

3    F.3d at 165 ("[W]e have often explained [that] a defendant's past

4    taxpaying record is admissible to prove willfulness

5    circumstantially."); Attanasio, 870 F.2d at 815.     The district

6    court included an instruction of this sort, but it expressly

7    related only to "evidence of acts of the defendants which may be

8    similar to those charged in the indictment, but which were

9    committed on other occasions."     Trial Tr. 3146:13-16, July 25,

10   2005.     Without a similar limiting instruction applicable to the

11   acts charged in the indictment, however, the government has not

12   demonstrated that the evidence relating to the 1996 Tax Counts or

13   the non-tax counts did not result in actual prejudice to the

14   jury's deliberation.     As a result, Shellef's judgment of

15   conviction on the 1999 Tax Count also must be vacated.14


          14
                The district court also gave this instruction:
                  Any wilful failure to comply with the
                  requirements of the Internal Revenue Code for
                  one year is a separate matter from any such
                  failure to comply for a different year. The
                  tax obligations of defendant Shellef in any
                  one year must be determined separately from
                  the tax obligations in any other year.
     That language is not sufficient to avoid the propensity problem.
     Even though the jury was instructed to "determine[] separately"
     guilt as to the tax charges, this instruction does not explain to
     the jury that, if it finds Shellef guilty on one tax charge, it
     may consider this conduct only as it relates to intent to commit
     the other tax charge. While the instruction properly directs the
     jury to determine guilt or innocence separately for each count,
     it does not limit the extent that the jury may consider evidence
     submitted to prove one count in determining guilt on another
     count. For the misjoinder to be harmless, given the facts of
     this case, such an instruction was required.

                                       37
1    B.   Sufficiency of the Evidence of Conspiracy as to Shellef

2               Shellef also argues that the evidence presented failed

3    to support his conviction for conspiring to defraud the IRS, and

4    that therefore his conviction must be reversed rather than

5    vacated.

6               Shellef contends that all of the evidence is consistent

7    with a motive to evade Allied's exclusive domestic

8    distributorship agreements by deceiving the company into thinking

9    that he would not sell the CFC-113 domestically.    Because that

10   scheme did not have as a necessary result the perpetration of a

11   fraud on the IRS and there is no additional evidence of actions

12   that would not be explained by a motive to deceive Allied instead

13   of the IRS, Shellef argues, we are required to vacate his

14   conviction for conspiracy.

15              But the government introduced considerable evidence of

16   conduct by Shellef and Rubenstein that supports the inference

17   that they intended to avoid payment of the excise tax entirely,

18   rather than only to trick Allied into selling them CFC-113.    For

19   example, Shellef represented to his buyers that the excise tax

20   had been paid; Rubenstein prepared documents indicating that the

21   material was either reclaimed or for export only; and Shellef

22   charged his customers just below Allied's tax-paid rate (and

23   significantly above the tax-free rate Shellef paid).    All this

24   was done after they had acquired the CFC-113, and hence is not

25   explainable solely by "the objective of obtaining the chemical

26   from Allied."   Shellef Br. at 51.   The evidence "allow[ed] the

                                     38
1    jury to reasonably infer that each essential element of the crime

2    charged," United States v. D'Amato, 39 F.3d 1249, 1256 (2d Cir.

3    1994), including the "inten[t] to impede or obstruct the IRS from

4    carrying out its functions," Gurary, 860 F.2d at 525, "has been

5    proven beyond a reasonable doubt," D'Amato, 39 F.3d at 1256.

6               In any event, even if the evidence was consistent with

7    a motive to defraud Allied, it is also consistent with a motive

8    to defraud the IRS.   Because we must draw all inferences in favor

9    of the verdict, United States v. Naiman, 211 F.3d 40, 46 (2d Cir.

10   2000), the challenge fails.

11   C.   Joinder of Charges against Rubenstein

12              For many of the same reasons that there was a

13   prejudicial misjoinder of the 1996 Tax Counts with the

14   conspiracy, wire fraud, and money laundering counts as they

15   relate to Shellef, a fortiori, the conspiracy and wire fraud

16   counts against Rubenstein were prejudicially misjoined with the

17   1996 Tax Counts against Shellef.     The indictment alleged that

18   Shellef and Rubenstein devised and executed the wire fraud and

19   conspiracy schemes together, but, as we have explained, the

20   connection between that scheme and the 1996 Tax Counts is too

21   tenuous to justify joinder under Rule 8.     Moreover, just as the

22   joinder of the 1996 Tax Counts with the non-tax counts against

23   Shellef may have materially and improperly influenced the jury's

24   deliberations on the non-tax counts as to Shellef, it also may

25   have materially and improperly influenced the jury's

26   deliberations on the wire fraud and conspiracy counts as to

                                     39
1    Rubenstein.     Indeed, the potential for prejudice arising from

2    misjoinder is arguably greater as for Rubenstein than Shellef,

3    not only because he had no connection at all with the 1996 Tax

4    Count, but also because he chose not to testify yet may have

5    suffered from any adverse credibility determinations made by the

6    jury regarding Shellef's testimony.     We therefore vacate the

7    jury's conviction of Rubenstein for wire fraud and conspiracy,

8    too.

9               III.    Issues on Remand

10              Because of the prejudicial misjoinder of charges

11   against the defendants, we must vacate and remand the case to the

12   district court for further proceedings.     Because several other

13   issues asserted as bases for vacatur of the defendants' judgments

14   of conviction have been fully briefed and argued, and because

15   they are likely to arise again on remand and retrial, we address

16   them here even though their resolution is not strictly necessary

17   in order to decide this appeal.

18   A.   Conspiracy to Defraud the IRS

19              Count One of the indictment charged that Shellef and

20   Rubenstein conspired to defraud the IRS.     See 18 U.S.C. § 371

21   (rendering it a crime to conspire "to defraud the United States,

22   or any agency thereof in any manner or for any purpose").

23   Shellef and Rubenstein challenge the sufficiency of the

24   indictment and the jury instructions on this count.     We conclude

25   that their challenges are without merit.

26              1.    Sufficiency of the Indictment.

                                       40
1              Shellef contends that the acts alleged in the

2    indictment do not constitute a conspiracy to defraud the IRS

3    because there is no allegation that he misled Allied or Elf

4    regarding the IRS registration number or certificates of export

5    required to make CFC-113 sales excise-tax free.    Without such a

6    misrepresentation, the CFC-113 remained taxable and Allied and

7    Elf should have charged Shellef and Rubenstein the applicable

8    excise taxes.   Only Allied and Elf are guilty of failure to pay

9    excise taxes.

10             The government responds that the likely success of the

11   alleged conspiracy is irrelevant.     All that is required is that

12   the indictment allege that Shellef and Rubenstein agreed to

13   defraud the IRS, that they participated knowingly and voluntarily

14   in the conspiracy, and that at least one of them committed an

15   overt act in furtherance of the conspiracy.    Because the

16   indictment meets these requirements, the government argues, it is

17   legally sufficient.

18             "The sufficiency of the indictment is a matter of law

19   that is reviewed de novo."    United States v. Pirro, 212 F.3d 86,

20   92 (2d Cir. 2000).    The elements of a conspiracy to defraud the

21   United States (also known as a "defraud clause conspiracy") are

22   "'(1) [that defendant] entered into an agreement (2) to obstruct

23   a lawful function of the government (3) by deceitful or dishonest

24   means and (4) at least one overt act in furtherance of the

25   conspiracy.'"   United States v. Ballistrea, 101 F.3d 827, 832 (2d

26   Cir. 1996) (quoting United States v. Caldwell, 989 F.2d 1056,

                                      41
1    1059 (9th Cir. 1993)) (brackets in original).   The "indictment

2    charging a defraud clause conspiracy [must] set forth with

3    precision the essential nature of the alleged fraud."     United

4    States v. Helmsley, 941 F.2d 71, 90 (2d Cir. 1991) (internal

5    quotation marks and citations omitted).

6              Here, the "essential nature of the alleged fraud" was

7    that Shellef and Rubenstein misled manufacturers about the

8    taxable status of their transactions.   Whether the manufacturers

9    themselves proceeded to mislead the IRS is immaterial.    All that

10   is necessary is that the scheme had the object of making it more

11   difficult for the IRS to carry out its lawful functions and that

12   the scheme depend on "dishonest or deceitful means."     See

13   Ballistrea, 101 F.3d at 831-32 ("[Title 18 U.S.C. § 371] covers

14   acts that interfere with or obstruct one of [the United States']

15   lawful governmental functions by deceit, craft or trickery, or at

16   least by means that are dishonest, even if the Government is not

17   subjected to property or pecuniary loss by the fraud" (citations

18   and quotation marks omitted; second brackets in original)).

19   Shellef and Rubenstein's scheme would have made it more difficult

20   for the IRS to collect taxes on the CFC-113 transactions because

21   Allied and Elf were allegedly misled by Shellef and Rubenstein as

22   to the chemical's destination.   Thus misinformed, Allied and Elf

23   could be expected, unwittingly or otherwise, to mislead the IRS

24   about the taxable status of their CFC-113 sales.

25             Shellef argues that because Allied and Elf, not Shellef

26   or Rubenstein, were under a duty to report the transactions to

                                      42
1    the IRS and pay the taxes, and because the transactions were

2    taxable unless further misrepresentations were made, either by

3    him or the manufacturers, he cannot be convicted under 18 U.S.C.

4    § 371.   But a defendant need not have a duty to report

5    transactions or pay taxes to be convicted of a conspiracy to

6    defraud the IRS with respect to those reports or payments.      See

7    United States v. Nersesian, 824 F.2d 1294, 1313 (2d Cir.), cert.

8    denied, 484 U.S. 958 (1987) ("[T]he fact that [the defendant]

9    . . . had no duty to report [the] transactions . . . is not the

10   operative issue as to whether he agreed to unlawfully defraud the

11   United States by impairing and obstructing [the IRS's] lawful

12   governmental function[] of collecting data. . . .").   Nor can

13   Shellef avoid the reach of the conspiracy statute by arguing that

14   his scheme would fail because other requirements for tax-free

15   treatment -- certification of export and IRS registration --

16   would not be satisfied.    "[T]he illegality of [a conspiracy] does

17   not depend upon the achievement of its goal" and it therefore

18   "does not matter that the ends of the conspiracy were from the

19   beginning unattainable."   United States v. Giordano, 693 F.2d

20   245, 249 (2d Cir. 1982) (citations omitted).

21              Shellef and Rubenstein's scheme, as alleged in the

22   indictment, is similar to that of the defendants in Nersesian,

23   824 F.2d at 1309-13.   Nersesian involved, among other things, the

24   requirement under the Bank Secrecy Act, 31 U.S.C. § 5311 et seq.,

25   that banks report currency transactions exceeding $10,000 in a

26   single day.   See Nersesian, 824 F.2d at 1310.   The defendants

                                      43
1    structured their transactions so the banks would not know that

2    they exceeded the $10,000 limit.      See id. at 1309-10.   Although

3    the defendants had no duty to report the transactions themselves,

4    we upheld their convictions under 18 U.S.C. § 371 because they

5    had "agreed to interfere with and to obstruct this lawful

6    function of the IRS."   Id. at 1313.15

7              Here, the indictment alleges that Shellef and

8    Rubenstein agreed to interfere with the IRS's collection of the

9    excise tax by conspiring to misrepresent to Allied and Elf the

10   CFC-113's destination, which in turn would lead them to refrain

11   from paying the excise tax.   Just as the Nersesian defendants

12   could be convicted for misrepresenting the nature of their

13   transactions to a third party who owed an independent duty to the

14   IRS, so can Shellef and Rubenstein.



          15
            United States v. Gurary, 860 F.2d 521 (2d Cir. 1988),
     cert. denied, 490 U.S. 1035 (1989), is also analogous. The three
     defendants in Gurary "sold invoices to corporations . . . falsely
     reflecting that one of the defendants' companies had sold goods
     to the invoice-purchasing company." Id. at 523. That it
     remained for the "[c]orporations purchasing the fictitious
     invoices [to] include[] the non-existent goods in their
     calculations of cost-of-goods sold for tax purposes, fraudulently
     misstating their taxable income" was ultimately of no moment.
     See id. (describing scheme); id. at 525 (holding that evidence
     supported the conspiracy count). Similarly, here, it remained
     for Allied and Elf to submit documents to the IRS falsely
     indicating that the CFC-113 they sold to Shellef and Rubenstein
     was, as they represented, exported. See id. at 525 (noting that
     "[a]ccurate disclosure of the transactions in corporate records
     and tax returns would prevent the scheme from working"). But
     Shellef and Rubenstein cannot avoid guilt by reason of the fact
     that they did not encourage Allied and Elf to take this further
     step -- the indictment sufficiently alleges that they "were well
     aware their scheme would . . . impede the IRS from learning" the
     transactions were domestic and hence taxable. Id.

                                      44
1                Shellef seeks to avoid the implications of Nersesian by

2    arguing that "[t]he reason that [the scheme in Nersesian]

3    interfered with the IRS's lawful function was that the financial

4    institutions could have no way of knowing that [the defendant]

5    was structuring transactions in a way to prevent the banks from

6    submitting" required reports.     Shellef Br. at 43.    But the

7    ability of the reporting party to discover the true nature of the

8    transaction is related only to the likelihood of the scheme's

9    success.    And, as noted, the likely success of the scheme is

10   immaterial.      Giordano, 693 F.2d at 249.

11               Finally, Shellef argues that the rule of lenity

12   prohibits application of the statute to his conduct.       But, as our

13   analysis indicates, the statute, as interpreted by our case law,

14   makes clear that his conduct is proscribed.       And "[t]he rule of

15   lenity . . . is not applicable unless there is a grievous

16   ambiguity or uncertainty in the language and structure of the

17   [statute], such that even after a court has seized every thing

18   from which aid can be derived, it is still left with an ambiguous

19   statute."    Chapman v. United States, 500 U.S. 453, 463 (1991)

20   (citations, internal brackets, and internal quotation marks

21   omitted).

22               The indictment sufficiently alleges a violation of 18

23   U.S.C. § 371.

24               2.   Jury Instructions.     Rubenstein asserts that the

25   jury instructions erroneously omitted an essential element from

                                        45
1    their description of the conspiracy offense.    The government

2    responds that, because Rubenstein made no contemporaneous

3    objection to the instructions, any error was not "plain" as

4    required by our review.

5              Rubenstein effectively concedes that he did not object

6    to these instructions.    But if these instructions were to be

7    issued again in the course of a new trial, Rubenstein presumably

8    would object.   Whether any error would be "plain error" is

9    therefore not an issue we need address.    We discuss only whether

10   the instructions were erroneous.

11             The district court instructed the jury on the

12   conspiracy count as follows:

13             In order to satisfy its burden as to Count
14             One, the government must prove each of the
15             following four essential elements beyond a
16             reasonable doubt: First, that two or more
17             persons entered the unlawful agreement
18             charged in the indictment starting in or
19             about July 1997; second, that each defendant
20             knowingly and willfully became a member of
21             the conspiracy; third, that one of the
22             members of the conspiracy knowingly committed
23             at least one of the overt acts charged in the
24             indictment; and fourth, that the overt act or
25             acts which you find to have been committed
26             was or were committed to further some
27             objective of the conspiracy.

28   Trial Tr. 3158-59, July 26, 2005.

29             [W]e have emphasized the need for particular
30             vigilance in enforcing the government's
31             burden of proof in prosecutions under § 371,
32             in view of the broad range of conduct covered
33             by the federal fraud statutes and the risk
34             that a defendant may be convicted of
35             conspiracy based upon an agreement other than
36             that specifically charged in the government's
37             indictment.

                                      46
1    United States v. Gallerani, 68 F.3d 611, 618 (2d Cir. 1995)

2    (internal quotation marks and citation omitted).     Applying

3    "particular vigilance," Gallerani, 68 F.3d at 618, we think that

4    the instruction here was erroneous, see United States v. Bayless,

5    201 F.3d 116, 127-28 (2d Cir.), cert. denied, 529 U.S. 1061

6    (2000) (noting that an error exists when there is a "deviation

7    from a legal rule which has not been waived" (internal quotation

8    marks and citation omitted)).     The elements of a section 371

9    conspiracy to defraud the United States are, as we have noted,

10   "(1) [that defendant] entered into an agreement (2) to obstruct a

11   lawful function of the government (3) by deceitful or dishonest

12   means and (4) at least one overt act in furtherance of the

13   conspiracy."      Ballistrea, 101 F.3d at 832 (brackets in original;

14   citation and internal quotation marks omitted).     The district

15   court did not instruct the jurors that they would be required to

16   find that Shellef and Rubenstein agreed to use "deceitful or

17   dishonest means" to obstruct the "lawful function of the

18   government."16

19   B.   Wire Fraud

20              The government also charged Shellef and Rubenstein with

21   multiple counts of wire fraud.     The wire fraud statute makes it a

22   federal crime to use interstate wire communication to execute a


          16
            We express no view as to whether this error was harmless.
     See United States v. Locascio, 6 F.3d 924, 939 (2d Cir. 1993),
     cert. denied, 511 U.S. 1070 (1994) (recognizing that we reverse
     on the basis of erroneous jury instructions only if "the
     defendants-appellants can show that the charge given, when read
     as a whole, caused them prejudice").

                                        47
1    "scheme or artifice to defraud, or for obtaining money or

2    property by means of false or fraudulent pretenses,

3    representations, or promises."    18 U.S.C. § 1343.   Shellef and

4    Rubenstein challenge the sufficiency of the indictment, the

5    sufficiency of the evidence for one of the government's theories,

6    and the jury instructions.

7              1.   Sufficiency of the Indictment.   The indictment here

8    contains two theories of fraud: a "no-sale" theory and a "tax

9    liability" theory.   "Where a jury is presented with multiple

10   theories of conviction, one of which is invalid, the jury's

11   verdict must be overturned if it is impossible to tell which

12   theory formed the basis for conviction."    United States v. Szur,

13   289 F.3d 200, 208 (2d Cir. 2002) (citations omitted).

14             a.   No-Sale Theory

15             Under the "no-sale" theory, the indictment alleges that

16   Shellef's misrepresentation "induced Allied Signal to sell

17   additional amounts of virgin CFC-113 to Poly Systems that it

18   would not have sold had it known that Shellef in fact intended to

19   sell the product domestically."    Indictment ¶ 53.   Shellef

20   contends that this theory is not viable because the scheme did

21   not constitute a scheme to defraud within the meaning of the wire

22   fraud statute.   The government responds that Shellef deprived

23   Allied of "'the right to define the terms for the sale of its

24   property'" and that this is sufficient to bring his scheme within

25   the reach of the wire fraud statute.    Gov't Br. at 40-43 (quoting

26   United States v. Schwartz, 924 F.2d 410, 421 (2d Cir. 1991).

                                       48
1              The "essential elements of a mail or wire fraud

2    violation are (1) a scheme to defraud, (2) money or property as

3    the object of the scheme, and (3) use of the mails or wires to

4    further the scheme."   Fountain v. United States, 357 F.3d 250,

5    255 (2d Cir. 2004), cert. denied, 544 U.S. 1017 (2005) (quotation

6    marks, citation, and brackets omitted).   "Because the mail fraud

7    and the wire fraud statutes use the same relevant language, we

8    analyze them the same way."   Schwartz, 924 F.2d at 416.    Although

9    the indictment need not allege that the victims of the fraud were

10   in fact injured, it is required to allege that the defendant

11   contemplated actual harm that would befall victims due to his

12   deception in order to meet the "scheme to defraud" prong.     See

13   United States v. Novak, 443 F.3d 150, 156 (2d Cir.), cert.

14   denied, --- U.S. ----, 127 S. Ct. 525 (2006).

15             Our cases have drawn a fine line between schemes that

16   do no more than cause their victims to enter into transactions

17   they would otherwise avoid -- which do not violate the mail or

18   wire fraud statutes -- and schemes that depend for their

19   completion on a misrepresentation of an essential element of the

20   bargain -- which do violate the mail and wire fraud statutes.

21             In United States v. Regent Office Supply Co., 421 F.2d

22   1174 (2d Cir. 1970), the defendants sold stationery, id. at 1176.

23   The defendants' scheme consisted of directing their sales

24   personnel to misrepresent their identities to prospective

25   customers so that the customers would be willing to entertain

26   their offers.   See id. (noting, as an example, that the sales

                                     49
1    personnel fraudulently claimed that they had been referred by a

2    friend of the customer or an officer of the customer's firm).       We

3    concluded that no conviction under the mail fraud statute could

4    stand where the misrepresentation was "not directed to the

5    quality, adequacy or price of goods to be sold, or otherwise to

6    the nature of the bargain."        See id. at 1179.

7               United States v. Starr, 816 F.2d 94 (2d Cir. 1987), is

8    similar.   The defendants there collected bulk mailings from their

9    customers and then sent them through the post office.       See id. at

10   95-96.   At the post office, however, they hid high-rate mail in

11   low-rate mail packages, and paid the low-rate price for the

12   entire shipments.     Id. at 96.    The defendants nonetheless charged

13   their customers as if the mailings were high-rate, and produced

14   and mailed false invoices to show that the high-rate price had in

15   fact been paid.     Id.   We decided that "[t]he misappropriation of

16   funds simply ha[d] no relevance to the object of the contract;

17   namely, the delivery of mail to the appropriate destination in a

18   timely fashion."     Id. at 100.    Because "[m]isrepresentations

19   amounting only to a deceit are insufficient to maintain a mail or

20   wire fraud prosecution," we concluded that such a charge can not

21   apply to situations where the alleged victims "received exactly

22   what they paid for" and "there was no discrepancy between

23   benefits reasonably anticipated and actual benefits received."

24   Id. at 98-99 (internal quotation marks and citation omitted); cf.

25   id. at 102 (Newman, J., concurring) ("An indictment for



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1    defrauding the Postal Service would have led to a conviction that

2    would surely have been affirmed.      However, the indictment for

3    defrauding the customers has led to a conviction that must be

4    reversed.")

5              In Schwartz, 924 F.2d 410, however, we were faced with

6    the type of misrepresentation that Regent Office recognized might

7    form the basis for a wire fraud prosecution -- that is, one

8    "directed to . . . the nature of the bargain," id. at 1179.         The

9    defendants in Schwartz had purchased night-vision goggles from

10   Litton Industries.   Schwartz, 924 F.2d at 414.     Because the Arms

11   Export Control Act restricted the sale of these goggles to

12   certain nations, Litton sought assurances, both in the contract

13   and during the course of performance, that the defendants would

14   not export to the restricted nations.      Id.   Though the defendants

15   promised to abide by all applicable export regulations, they sold

16   the goggles to nations that were prohibited from purchasing them.

17   Id. at 414-16.   We upheld their conviction for wire fraud under a

18   no-sale theory because the "misrepresentations went to an

19   essential element of the bargain between the parties and were not

20   simply fraudulent inducements to gain access to Litton

21   equipment."   Id. at 421.   The defendants had "deprived Litton of

22   the right to define the terms for the sale of its property in

23   that way," that is, that its product not be exported from this

24   country illegally, and therefore "cost it, as well, good will."

25   Id.


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1               The indictment in the case before us alleges:

2               It was a further part of the scheme and
3               artifice that by promising to export all of
4               the CFC-113 purchased, defendant DOV SHELLEF
5               induced Allied Signal to sell additional
6               amounts of virgin CFC-113 to Poly Systems
7               that it would not have sold had it known that
8               SHELLEF in fact intended to sell the product
9               domestically.

10   Indictment ¶ 53.   As in Starr, the indictment here does not

11   allege, pursuant to the government's "no-sale" theory, that there

12   was a "discrepancy between benefits reasonably anticipated" and

13   actual benefits received.   Starr, 816 F.2d at 98.   And as in

14   Regent Office, it fails to allege that Shellef misrepresented

15   "the nature of the bargain."    Regent Office, 421 F.2d at 1179.

16   Instead, the indictment states only that Shellef's

17   misrepresentation induced Allied to enter into a transaction it

18   would otherwise have avoided.   Because it does not assert that

19   Shellef's misrepresentation had "relevance to the object of the

20   contract," Starr, 816 F.2d at 100, we do not think it is legally

21   sufficient.

22              We recognize that the facts on which this prosecution

23   rested closely resemble those in Schwartz.    As in Schwartz, in

24   the case at bar, government regulations and the contract between

25   the parties called for territorial restrictions on the sale of a

26   product.   But we are concerned here only with the sufficiency of

27   the indictment, not the sufficiency of the evidence.   The jury

28   here might have erroneously convicted Shellef and Rubenstein even

29   though it concluded that the defendants did not misrepresent an


                                      52
1    "essential element" of the bargain, but rather made "simpl[e]

2    fraudulent inducements to gain access to" Allied and Elf

3    products.    Schwartz, 924 F.2d at 421.   Because we cannot rule out

4    that possibility, we do not think a jury can be permitted to

5    convict either defendant on the "no-sale" theory.      See Szur, 289

6    F.3d at 208 (concluding that a remand is required where the jury

7    may have convicted on a legally invalid theory).

8                b.   Tax Liability Theory

9                Under the "tax liability" theory, the indictment

10   alleges that Shellef's misrepresentation regarding the

11   destination of the CFC-113 "induced Allied Signal to continue to

12   sell the product to Poly Systems without paying the excise tax to

13   the Internal Revenue Service, or including the tax in the price

14   it charged Poly Systems."     Indictment ¶ 52.   Shellef argues that

15   the taxes could not have been "property" within the meaning of

16   the wire fraud statute because Shellef's scheme could not have

17   deprived Allied of the tax money that was owed to the federal

18   government.

19               We disagree.   Under the agreement, Shellef owed Allied

20   the amount of "any federal excise tax imposed on the sale of" the

21   CFC-113 "which is not anticipated by Seller at the time of

22   contract execution."     Allied Contract, effective Jan. 1, 1996, at

23   4 ¶ 11.C; id. at 2 ¶ 6.B.     The agreement also required Shellef to

24   sell the CFC-113 abroad.     Id. at 1 ¶ 1.   Shellef misrepresented

25   the destination of the CFC-113 he was purchasing from Allied so

26   that he could avoid paying to Allied the price increase

                                       53
1    necessitated by the application of the excise tax.    Allied

2    therefore did not receive the money due it under the agreement,

3    property that was owed to it.   To be sure, that money was

4    destined to be passed on to the government.    But that is not

5    relevant to our inquiry.   Allied had a right to the property and

6    Shellef's scheme was intended to deprive Allied of it.    It was

7    therefore a scheme to deprive within the meaning of the wire

8    fraud statute.   See United States v. Males,    459 F.3d 154, 158

9    (2d Cir. 2006) ("[I]t is sufficient that a defendant's scheme was

10   intended to deprive another of property rights, even if the

11   defendant did not physically 'obtain' any money or property by

12   taking it from the victim.").

13             2.   Sufficiency of Evidence.    Shellef argues that the

14   evidence was not sufficient to sustain his conviction under the

15   "no-sale" theory.   As noted above, we doubt the legal sufficiency

16   of the allegations on the "no-sale" theory and therefore need not

17   and do not consider the evidentiary sufficiency of a conviction

18   based upon it in the previous trial.    Shellef does not seriously

19   contest the sufficiency of the evidence at that trial with

20   respect to the "tax liability" theory.

21             3.   Jury Instructions.    Rubenstein asserts that the

22   district court's instructions as to wire fraud were erroneous

23   because the district court did not caution the jury that

24   Rubenstein could not be found guilty as an aider and abetter

25   based only on a "general knowledge or suspicion that a crime was

26   being committed" or his "'mere association' with the alleged

                                     54
1    principal, defendant Shellef."   The district court issued an

2    instruction for the wire fraud counts and included in the

3    instruction a verbatim reading of the aiding and abetting

4    statute.   No party appears to contest that they accurately

5    describe the elements of wire fraud.     Nor does Rubenstein argue

6    that the aiding and abetting instruction was incorrect -- he

7    asserts only that additional cautionary instructions should have

8    been given.   We conclude that the instruction was not improper.

9    C.   Evidentiary Rulings

10              Shellef and Rubenstein assert that evidentiary rulings

11   during the course of trial violated their constitutional right to

12   present a meaningful defense17 and their Sixth Amendment right to

13   confront witnesses.   In light of the deference we owe to a

14   district court's decisions as to admissibility of evidence, see,

15   e.g., United States v. Ebbers, 458 F.3d 110, 122 (2d Cir. 2006),

16   cert. denied, --- U.S. ----, 127 S. Ct. 1483 (2007), and because

17   we cannot foresee what decisions the district court might make in

18   any new trial, or in precisely what context those decisions might

19   be made, we decline to comment on them or the arguments of the

20   government and the defendants in this regard.

21                               CONCLUSION




          17
             "Whether rooted directly in the Due Process Clause of
     the Fourteenth Amendment, or in the Compulsory Process or
     Confrontation clauses of the Sixth Amendment, the Constitution
     guarantees criminal defendants 'a meaningful opportunity to
     present a complete defense.'" Crane v. Kentucky, 476 U.S. 683,
     690 (1986) (citations omitted).

                                      55
1             Having reviewed the remainder of the defendants'

2   arguments, we conclude that they are without merit.   Because the

3   1996 Tax Counts were improperly joined with the remainder of the

4   charges against Shellef and Rubenstein; and because these errors

5   were not harmless, we vacate the judgments of conviction of both

6   defendants and remand the case to the district court for further

7   proceedings.




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