United States District Court, E.D. Louisiana
ORDER AND REASONS
MARTIN L. C. FELDMAN, District Judge.
Before the Court are two motions: (1) the government's motion to vitiate the proffer agreement with Arata; and (2) Michael Arata's motion to dismiss for prejudicial joinder or, alternatively, to sever. For the reasons that follow, the Court defers ruling on the government's motion pending a limited evidentiary hearing, and Arata's motion is DENIED.
Peter and Susan Hoffman and Michael Arata were partners in various movie-related business ventures. One such venture was the purchase and renovation of a dilapidated mansion on Esplanade Avenue in New Orleans, which they turned into a post-production film editing facility. This federal white collar criminal case arises from the government's allegations that - in connection with the renovation project - the Hoffmans and Mr. Arata (through companies they owned) allegedly committed, aided and abetted, and conspired to commit, mail and wire fraud by submitting false expense reports in order to deceive the State of Louisiana into issuing state tax credits that they had not actually earned and were not entitled to receive. Mr. Arata, alone, is also charged with making false statements to federal agents.
The facts giving rise to this criminal case are more completely summarized in the second superseding indictment and in this Court's Order and Reasons dated July 18, 2014. United States v. Hoffman, No. 14-22, 2014 WL 3589563, at *1-3 (E.D.La. July 18, 2014). The background facts most pertinent to the resolution of the present motion are summarized here.
In renovating the property at 807 Esplanade Avenue, Peter Hoffman,  Susan Hoffman,  and Michael Arata,  through their respective companies, availed themselves of the Louisiana film infrastructure tax credit program. They submitted three applications and supporting documents to the State for tax credits. As statutorily required, the defendants first submitted the 807 Esplanade expenditures to auditors for verification. To verify the expenditures, the auditors requested proof of payment such as invoices, bank transfers, bank statements, and other corporate financial records. Based on this information, the auditors created audit reports detailing the defendants' claimed expenditures on 807 Esplanade. These audit reports were submitted as part of the February 26, 2009, January 20, 2010, and July 3, 2012 submissions to the State for film infrastructure tax credits.
On June 19, 2009 the State issued $1, 132, 480.80 in tax credits to Seven Arts Production Louisiana, LLC as a result of the first application, the February 26, 2009 submission. Mr. Arata paid cash to the partnership for these tax credits, at a discounted price, through his company LEAP Film Fund II, LLC, and then sold the tax credits to local businesses and individuals for profit. (The State did not issue tax credits based on the January 20, 2010 and July 3, 2012 applications).
On January 27, 2014 Mr. Arata, during the government's investigation, with his counsel present, made statements to a Special Agent of the FBI pursuant to a written proffer agreement with the government. The government bargained for "completely truthful" information "with no material misstatements or omissions of fact" so that it could "assess the value, extent, and truthfulness of [Mr. Arata's] information about the criminal liability of [Mr. Arata] and others" in order to "ultimately reach a decision concerning [Mr. Arata's] cooperation." In exchange, Mr. Arata received assurances from the government that "statements or information contained in [Mr. Arata's] proffer may not be used in the government's case-in-chief against [Mr. Arata] should a trial be held."
Shortly thereafter, on February 6, 2014 a grand jury returned a six-count Indictment, charging Peter Hoffman and Michael Arata with conspiracy (Count 1), as well as aiding and abetting, and actually committing wire fraud (Counts 2-6), in violation of 18 U.S.C. §§§ 371, 2, 1343. After first superseding on April 3, 2014,  the government filed a 25-count second superseding indictment on May 15, 2014, charging the Hoffmans and Mr. Arata with conspiring to commit, committing, and aiding and abetting, wire and mail fraud, in violation of 18 U.S.C. §§ §§ 371, 1343, 1341, and 2.
With respect to Count 1, which alleges conspiracy to use the mail or wires in furtherance of the defendants' scheme to defraud, the government alleges 37 specific overt acts, and charges that the defendants accomplished their conspiracy, and took steps to conceal their scheme from the State, when they: 1). prepared and filed material false and misleading tax credit applications, fraudulently claiming that certain expenditures had been made to 807 Esplanade when those expenditures had not been made; 2). prepared and submitted to the auditors and to the State materially false and misleading internal accounting books and records and payment receipt certifications to make it appear as if certain expenditures had been made and certain items had been paid for and received when those expenditures had not been made and those items had not been paid for or received; 3). prepared and submitted to the auditors and the State materially false and misleading invoices in support of fraudulent expenditures; 4). conducted materially false and misleading circuitous bank transfers of money to make it appear that certain items were paid for when those items had not been paid for; and 5). prepared and submitted to the auditors proofs of payment that were materially false and misleading in that only outgoing money transfers were disclosed to the auditors when the money had actually been immediately returned to the original bank account and those return money transfers were not disclosed to the auditors.
As to the wire fraud charges (Counts 2-5 against Peter Hoffman and Michael Arata and Counts 6-20 against all three defendants), the government alleges:
Beginning on or about March 1, 2006, and continuing until on or about July 3, 2012, in the Eastern District of Louisiana and elsewhere, the defendants, Peter Hoffman, Michael Arata, Susan Hoffman... did knowingly and willfully devise and intend to devise a scheme and artifice to defraud and to obtain money and property by means of false and fraudulent pretenses, representations and promises by submitting and causing to be submitted materially false, misleading and fraudulent information to the auditors and to the State of Louisiana for the purpose of obtaining infrastructure tax credits relative to 807 Esplanade. All in violation of Title 18, United States Code, Sections 1343 and 2.
With respect to the mail fraud charge (Count 21), the government alleges:
On or about February 3, 2010... the defendants, Peter Hoffman, Michael Arata, Susan Hoffman... for the purpose of executing and attempting to execute, and in furtherance of, the scheme and artifice to defraud set forth in paragraph 2 of Counts 6 through 20 above, did knowingly send and cause to be sent, delivered, and moved by private commercial interstate carriers correspondence dated February 2, 2010, addressed to an auditor for the State of Louisiana with attached exhibits, corporate agreements, and invoices for project management, equipment consulting, and office rent. All in violation of Title 18, United States Code, Sections 1341 and 2.
The second superseding indictment also charges Mr. Arata with making false statements to federal agents. The false statement counts - Counts 22 through 25 - charge:
On or about January 27, 2014, in the Eastern District of Louisiana, in a matter within the jurisdiction of the United States Department of Justice, a department of the Government of the United States, the defendant, MICHAEL ARATA, did knowingly and willfully make materially false, fictitious and fraudulent statements and representations to a Special Agent of the Federal Bureau of Investigation as more particularly described in each count below:
COUNT DESCRIPTION OF STATEMENT 22 MICHAEL ARATA stated that he terminated his relationship with defendant PETER HOFFMAN in or about July 2009, when in truth and in fact, as he then well knew, he had continued working with PETER HOFFMAN including reviewing and preparing information for the January 20, 2010 application for tax credits and other tax credit related business ventures. 23 MICHAEL ARATA stated that he was not aware that $350, 000 in legal fees were submitted to the State of Louisiana for tax credits, when in truth and in fact, as he then well knew, he was aware that $350, 000 in legal fees had been submitted to the State and he had personally provided information to the auditors in support of the claimed legal fees in order to assist in the completion of the January 20, 2010 application for tax credits.
24 Regarding film equipment reported in the February 26, 2009 tax credit application to the State of Louisiana, MICHAEL ARATA stated that the film equipment had been "acquired" in that the equipment would be contributed to 807 Esplanade by the vendor as a business partner, when in truth and in fact, as he then well knew, the equipment had not been acquired or contributed and that he had repeatedly advised the auditors and the State that the equipment had been purchased and paid for. 25 MICHAEL ARATA stated he thought he fully disclosed both sides of the transactions for construction and equipment expenditures to the auditors, when in truth and in fact, as he then well knew, he had purposely concealed the circular transactions from the auditors.
All in violation of Title 18, United States Code, Section 1001.
All three defendants moved to dismiss Counts 1 through 21 of the second superseding indictment (which charge them with conspiracy to commit mail and wire fraud, as well as committing and aiding and abetting mail and wire fraud) on the ground that the indictment fails as a matter of law to state offenses against the United States; unissued tax credits, the defendants submitted, are not "property" and, therefore, cannot be the object of a mail or wire fraud scheme. On July 18, 2014 the Court denied the defendants' motions to dismiss Counts 1 through 21, holding that the film tax credits at issue constitute "money or property." United States v. Hoffman, No. 14-22, 2014 WL 3589563, at *9-11 (E.D.La. July 18, 2014). Thereafter, Mr. Arata sought dismissal of Counts 22 through 25, the false statements charges, on the ground that by bringing those charges the government breached a proffer agreement. In denying the motion without prejudice on October 8, 2014, the Court examined the terms of the written proffer agreement, which was signed on January 27, 2014 by counsel for the government and by Mr. Arata in advance of a proffer meeting held that day. See United States v. Hoffman, No. 14-22, 2014 WL 5040721 (E.D.La. October 8, 2014). The January 27, 2014 proffer letter states:
It is my understanding that your client, Michael Arata, is interested in providing a proffer of information and cooperation to investigating agents. And, the government is also interested in pursuing this matter. However, before a decision can be reached concerning whether or not your client should be afforded any concessions, the proffer must take place. The proffer will allow the government to assess the value of the information and ultimately reach a decision concerning your clients cooperation.
The requirements set out in this letter are necessary to avoid the need for a Kastigar or taint hearing, whereby the government would be forced to demonstrate that its evidence was not tainted by a statement made by your client during the proffer discussion, if there were a trial in this matter. Therefore, this letter sets forth the ground rules for addressing the proffer of information your client wishes to provide:
1. Purpose: The purpose of your client making a proffer is to provide the government with an opportunity to assess the value, extent, and truthfulness of your client's information about the criminal liability of your client and others.
2. Truth: Your client's proffer must be completely truthful with no material misstatements or omissions of fact.
3. Recording: At the government's option, the proffer interview may be tape-recorded, videotaped, or recorded through an agent's or government attorney's handwritten notes.
[4. Polygraph examination requirement, which apparently was struck from letter and initialed and, thus, inapplicable.]
5. No promises: While your client hopes to receive some benefit by cooperating with the government, your client expressly understands that the government is making no promise of any consideration at this time.
6. No direct use: The government agrees that statements or information contained in your client's proffer may not be used in the government's case-in-chief against your client should a trial be held. This provision does not apply to any statement made by your client regarding crimes of violence pursuant to paragraph 11 of this agreement.
7. Impeachment: If your client should testify materially contrary to the substance of the proffer, or otherwise present in a legal proceeding a position materially inconsistent with the proffer, the proffer may be used against your client as impeachment or rebuttal evidence, or as the basis for a prosecution for perjury or false statement.
8. Derivative Use: The government may make derivative use of, and may pursue investigative leads suggested by, any statements or information provided by your client's proffer. This provision is necessary to eliminate the necessity of a Kastigar hearing wherein the government would have had to prove that the evidence it sought to introduce at trial or in a related legal proceeding is derived from "a legitimate source wholly independent" of statements or information from the proffer. Furthermore, by signing this document, you and your client waive any hearing pursuant to Kastigar v. United States, 406 U.S. 441 (1972).
9. Sentencing Information: Your client understands that if he becomes an indicted defendant, the government, pursuant to 18 U.S.C. Section 3661, must provide to the client's sentencing judge the contents of the proffer. Pursuant to U.S.S.G. Section 1B1.8, however, the proffer may not be used to determine the appropriate guideline sentence, except as stated in the "Impeachment" paragraph above.
10. Brady Discovery: Your client understands that Brady v. Maryland and its progeny require that the government provide any other indicted defendant all information known to the government which tends to mitigate or negate such defendant's guilt. Should your client's proffer contain Brady material, the government will be required to disclose this information to the appropriate defendant(s).
11. Crimes of Violence: Any statements made by your client concerning any crime of violence may be used against your client directly or indirectly.
12. Full Agreement: This document constitutes the full and complete agreement of the parties.
The Court determined that "the government has not breached the proffer agreement simply by presenting to the grand jury and including the false statement counts in the superseding and second superseding indictment[;] the government did not need to seek the Court's advance permission to charge Mr. Arata." See Hoffman, 2014 WL 5040721, at *6 (emphasis added). Nevertheless, the Court noted that the parties' submissions and, thus, the Court's ruling left outstanding "an obvious unresolved issue that must be dealt with, pre-trial[:] whether or not Mr. Arata materially breached an agreement with the government such that the government is absolved of any of its obligations under the proffer agreement." Id . The government now seeks a judicial determination that Mr. Arata breached the proffer agreement; the government requests that the Court vitiate the proffer agreement so that the government may be absolved from its conditional promise not to use his proffer statements in its case-in-chief. Mr. Arata opposes the government's request with respect to the proffer agreement, and he also seeks to dismiss Counts 1 through 21 of the second superseding indictment or, alternatively, he seeks severance on the ground that joinder is prejudicial because he withdrew from the alleged conspiracy in August 2009.
Motion to Vitate Proffer Agreement
1. Legal Standard: Material Breach by a ...