United States District Court, E.D. Louisiana
March 20, 2015
UNITED STATES OF AMERICA
PETER M. HOFFMAN, MICHAEL P. ARATA, SUSAN HOFFMAN, SECTION
ORDER AND REASONS
MARTIN L. C. FELDMAN, District Judge.
Before the Court are two motions by defendant Peter Hoffman: (1) motion to exclude statements by defendant Michael Arata as subject to attorney-client privilege (Federal Rule of Evidence 501); and (2) motion for severance pursuant to Rule 14(a) of the Federal Rules of Criminal Procedure. For the reasons that follow, the motion to exclude statements is DENIED in part insofar as the Hoffmans assert blanket privilege, but the Court defers ruling as to specific communications pending the submission of supplemental papers addressing whether or not specific communications might be privileged. The motion for severance is DENIED without prejudice as premature.
In this white collar criminal case, the government charges three defendants with wire fraud, mail fraud, conspiracy, aiding and abetting, and, as to Mr. Arata only, also charges false statements to federal agents.
In connection with transforming a dilapidated mansion at 807 Esplanade Avenue into a post-production film studio, the government charges that Peter and Susan Hoffman and Michael Arata (who through companies they owned were partners in various movie industry ventures) committed, aided and abetted, and conspired to commit, mail and wire fraud by submitting false and misleading bank statements and 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.
In late 2013, during the federal government investigation into Louisiana film infrastructure tax credit fraud, the government was approaching a five-year statute of limitations on federal crimes government agents believed had been committed. It was during this time frame that the government was considering whether or not Michael Arata should be charged with federal crimes along with Peter and Susan Hoffman in connection with certain infrastructure tax credit applications that had been submitted to the State. On December 20, 2013 the government moved to compel Michael Arata to answer questions and produce documents; Arata had refused to do so because Peter Hoffman had asserted the attorney-client privilege. Judge Milazzo ordered that Arata appear in camera for examination by the Court on January 14, 2014. After meeting with him, Judge Milazzo found that Arata had no attorney-client relationship with Hoffman with regard to 807 Esplanade. Judge Milazzo then denied Peter Hoffman's motion for reconsideration, again finding that there was no attorney-client privilege because Arata and Hoffman were business partners in 807 Esplanade.
On more than one occasion during the government's investigation, Mr. Arata, who was represented by counsel, met with FBI agents and government attorneys. One such meeting took place on January 27, 2014 at the FBI's New Orleans Field Office. Michael Arata was present with his attorneys, Eddie Castaing and Billy Gibbens. AUSA Dall Kammer was also present, along with Melanie Haggarty, a forensic accountant with the FBI. After Mr. Arata, his counsel, and AUSA Kammer signed a proffer agreement, FBI Special Agent Robert Blythe conducted the questioning; the substance of the interview, the information provided by Mr. Arata to interviewing agents, was transcribed by the Special Agent Blythe in a 10-page Form 302.
At the end of the three-hour meeting, the participants discussed meeting for another session but, instead, ten days later, 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, and 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. The second superseding indictment also charges Mr. Arata with making false statements to federal agents, in violation of 18 U.S.C. § 1001.
Counts 22 through 25 (four false statement counts) charge that Mr. Arata made false statements to FBI agents during the January 27, 2014 proffer session. Whether or not the government may in its case-in-chief introduce Arata's proffered statements has been the subject of prior motion practice. See United States v. Arata, No. 14-22, 2014 WL 5040721 (E.D. La. Oct. 8, 2014) and United States v. Arata, No. 14-22, 2014 WL 7330618 (E.D. La. Dec. 18, 2014). Mr. Arata sought dismissal of Counts 22 through 25 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. United States v. Arata, No. 14-22, 2014 WL 5040721 (E.D. La. Oct. 8, 2014). 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 Arata, 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 . Thereafter, the government filed a motion to vitiate the proffer agreement with Arata; in so doing, the government sought a judicial determination that Mr. Arata breached the proffer agreement, thereby absolving the government from its conditional promise not to use his proffer statements in its casein-chief. Arata opposed the motion and requested an evidentiary hearing. The Court granted Arata's request for an evidentiary hearing and deferred ruling on the government's motion pending a limited evidentiary hearing. United States v. Arata, No. 14-22, 2014 WL 7330618 (E.D. La. Dec. 18, 2014). On December 18, 2014, the Court summarized at some length the parties' contentions and their characterization of the documentary evidence. But the Court deferred ruling on whether the government had proven by a preponderance of the evidence that Arata had materially breached the proffer agreement's requirement that he "be completely truthful." Meanwhile, Mr. Arata also challenged the admissibility of his proffered statements on an independent ground: he sought an order precluding the government from using his proffer statements in the government's case-in-chief on the ground that his statements constitute plea discussions rendered inadmissible by Federal Rule of Evidence 410. An evidentiary hearing was held on February 25, 2015 in which evidence was presented on the government's motion to vitiate the proffer agreement and on Arata's motion to preclude the government from using his January 27 statements in its case-inchief. On March 6, 2015 the Court issued its Order and Reasons in which it granted the government's motion to vitiate the proffer agreement on the ground that the government had carried its preponderance burden as to the legal fees issue, and denied Arata's motion in limine regarding Federal Rule of Evidence 410 on the ground that there was no evidence that there were any plea discussions during the proffer.
Almost a year after Judge Milazzo issued her rulings regarding Hoffman's attorney-client privilege claims, Peter and Susan Hoffman now seek to exclude all statements made by Arata in his January 27, 2014 proffer session with the FBI, as well as all communications between him and Arata "relating to the requirements to obtain tax credits under Louisiana law." Peter Hoffman also urges the Court to sever his trial from Mr. Arata's.
Peter Hoffman asserts that Michael Arata was counsel for Seven Arts Pictures Louisiana LLC, and that "Arata has made statements disclosing information learned through the course of his representation." Asserting the attorney-client privilege and invoking Federal Rule of Evidence 501, Peter and Susan Hoffman seek to exclude certain statements or information from evidence at trial. In particular, the Hoffmans seek to exclude the statements made by Michael Arata to the FBI on January 27, 2014, as reflected in the Form 302, in which Special Agent Blythe memorialized his interview with Michael Arata, as well as "all documents or other tangible things... between Mr. Arata and Mr. Hoffman relating to the requirements to obtain tax credits under Louisiana law." More specifically, the Hoffmans identify as privileged certain exhibits (Exhibits A, B, C, D, E, G, H, J, and K) attached to Mr. Arata's prior motion to dismiss or sever on the ground of prejudicial joinder. Each of these exhibits, Hoffman submits, are confidential communications whose predominant purpose was legal advice under the film tax credit statute and regulations.
The government urges the Court to deny the Hoffmans' motion to exclude statements for four reasons: (1) they have not satisfied their burden of proof; (2) no privilege exists because Arata and Hoffman were business partners; (3) the crime-fraud exception applies; and (4) any privileges have been waived.
Federal Rule of Evidence 501 provides:
The common law-as interpreted by the United States courts in light of reason and experience-governs a claim of privilege unless any of the following provides otherwise:
the United States Constitution;
a federal statute; or
rules prescribed by the Supreme Court.
The purpose and scope of the attorney-client privilege is wellsettled:
The purpose of the privilege is to "encourage full and frank communication between lawyers and their clients and thereby promote broader public interests in the observance of law and administration of justice." On the other hand, because the privilege "has the effect of withholding relevant information from the fact-finder, it applies only where necessary to achieve its purpose."
The assertor of the lawyer-client privilege must prove:
(1) that he made a confidential communication; (2) to a lawyer...; (3) for the primary purpose of securing either a legal opinion or legal services, or assistance in some legal proceeding.
United States v. Robinson, 121 F.3d 971, 974 (5th Cir. 1997)(internal citations omitted). The attorney-client privilege "recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). Notably, the privilege is not absolute and it "only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney." Id . 449 at 395. Toward that end, "the attorneyclient privilege may not be tossed as a blanket over an undifferentiated group of documents[; rather, it] must be specifically asserted with respect to particular documents." See United States v. El Paso Co., 682 F.2d 530, 539 (5th Cir. 1982).
If the assertor of the privilege proves entitlement to the privilege with respect to specific communications, the privilege nevertheless may be overcome if the party opposing its assertion makes a prima facie showing that the communication "is intended to further continuing or future criminal or fraudulent activity.'" United States v. Edwards, 303 F.3d 606, 618 (5th Cir. 2002)(citations omitted). This crime-fraud exception recognizes that the privilege will "protect the confidences of wrongdoers", but when the advice sought relates to future wrongdoing, the privilege goes beyond that which is necessary to achieve its purposes. See United States v. Zolin, 491 U.S. 554, 562-63 (1989).
The Court's task is complicated by the undisputed facts that Mr. Arata was a business partner, co-owner, and investor in the 807 Esplanade project, but he is also a lawyer, who drafted legal opinions on behalf of the project. Hoffman urges, in conclusory fashion, that his communications with Arata were communications made for the primary purpose of securing a legal opinion, legal services, or assistance in a legal proceeding. However, it is Hoffman's burden to show as to each particular communication he claims is privileged, that Seven Arts was consulting Arata in his capacity as lawyer and not in his capacity as co-venturer. See United States v. Davis, 636 F.2d 1028, 1044 (5th Cir. 1981)("An attorney who acts as his client's business advisor, or his agent for receipt or disbursement of money or property to or from third parties is not acting in a legal capacity, and records of such transactions are not privileged); In re Vioxx Products Liab. Litig., 501 F.Supp.2d 789, 805 (E.D.La. 2007)(Fallon, J.) (citation omitted)("An attorney's involvement in, or recommendation of, a transaction does not place a cloak of secrecy around all the incidents of such a transaction. This cannot be gotten around by the simple expedient of putting a lawyer in the shoes of the executive."); Cissel, Federal Criminal Trials, 4th ed. (1996), Section 19-2(b)(2), p. 483 ("[F]or a communication to qualify for the privilege the client must be consulting the lawyer as a lawyer, and not in the capacity as a participant in a business transaction."); Weinstein's Federal Evidence, Second Ed., 503.13[c] ("If an attorney joins an entrepreneur in a business deal, the attorney's role generally is that of business advisor, even though the attorney may be rendering incidental legal advice. Payment of the legal fee in the form of a piece' of the business, either by stock ownership or a percentage of profits, generally makes the attorney a part of the enterprise rather than legal counsel for the purposes of the privilege."). This is a tall order for Hoffman, in light of the fact that Arata was part-owner, had a financial interest in the project, worked with Hoffman to obtain tax credits for the project in furtherance of their business goals, and, indeed, that, as some evidence suggests, it was Mr. Hoffman's understanding that Arata was being compensated for any legal work on the project by virtue of his ownership interest.
That Michael Arata drafted a few opinion letters, acted as middle man with the auditors regarding infrastructure tax credit applications, confirmed his legal services to the auditor, and sent a letter to Mr. Hoffman on August 6, 2009 terminating his "representation" does not compel a finding that Arata was Seven Arts's lawyer to the exclusion of his role as business partner. To the contrary, because it is undisputed that Michael Arata and Peter Hoffman were business partners on the 807 Esplanade project, Mr. Hoffman cannot simply cloak with the privilege all communications he had with Mr. Arata "relating to the requirements to obtain tax credits under Louisiana law." The attorney-client privilege "is to be construed narrowly to apply only where its application would serve its purposes; where it is doubtful that a client means to communicate confidentially, the privilege does not attach, as the client would have acted similarly even without the privilege." See Robinson, 121 F.3d at 975. The Hoffmans fail to persuade the Court that, among them and Mr. Arata, business partners, all communications - legal advice and business discussions - are protected by the attorney/client privilege.
Nevertheless, the Court turns to consider those specific documents Mr. Hoffman claims are privileged. The Court first observes that it is not clear whether or not these documents (many of them emails) will be used at trial as evidence (and it is not clear as to Exhibit A in particular whether the Court has the complete email chain, which of course could be critical in construing whether a communication was confidential). The Court will not give advisory rulings. Moreover, Mr. Hoffman did not identify the documents over which he was asserting the privilege until he filed his reply papers; thus, the government has not articulated its position as to whether any of these materials might be privileged, or whether any privilege might have been waived. More briefing is required.
Peter Hoffman next seeks relief under Rule 14(a) of the Federal Rules of Criminal Procedure, for prejudicial joinder, which he says requires severance. When considering Mr. Arata's request for dismissal or severance, the Court has already ruled that "the government charges a series of acts unified by substantial identity of facts. For this reason, the Court is satisfied that the defendants and charges are properly joined under Rule 8." See United States v. Arata, No. 14-22, 2014 WL 7330618 (E.D. La. Dec. 18, 2014). Mr. Hoffman does not quarrel with this finding; instead, Mr. Hoffman advances two grounds that he says support severance for prejudicial joinder. First, he invokes the Bruton doctrine based on his Sixth Amendment right to confront witnesses against him. Second, he invokes Zafiro's rule of transference of guilt or overspill. A claim of prejudice resulting from joinder triggers Rule 14. However, Hoffman has not demonstrated entitlement to Rule 14 relief based on Bruton or Zafiro.
Recognizing that joinder might in some cases prejudice a defendant, or even the government, Rule 14(a) of the Federal Rules of Criminal Procedure invests the Court with the discretion to "order separate trials of counts, sever the defendants' trials, or provide any other relief that justice requires." Fed. R. Crim. P. 14(a). When defendants are indicted together, joint trials are favored, because "[t]hey promote efficiency and serve the interests of justice by avoiding the scandal and inequity of inconsistent verdicts." Zafiro v. United States, 506 U.S. 534, 537 (1993) (internal quotation marks and citation omitted). This is especially true when, as here, a conspiracy is charged. See United States v. Perez, 489 F.2d 51, 65 (5th Cir. 1973).
Given the efficiencies undergirding and the judicial system's preference for joint trials of defendants indicted together, a defendant "must overcome significant obstacles" to prevail on a request to sever his trial from that of his co-defendants. See United States v. McCrae, 702 F.3d 806, 821 (5th Cir. 2012). That is, once properly joined in an indictment, a defendant must show "specific and compelling prejudice" to be entitled to severance of a joint trial. United States v. Krenning, 93 F.3d 1257, 1267 (5th Cir. 1996). A severance is appropriate under Rule 14 only where "there is a serious risk that a joint trial would compromise a specific trial right of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence." Zafiro, 506 U.S. at 539. Severance could be appropriate, for example, where evidence that is probative of one defendant's guilt but inadmissible against another defendant presents a risk of prejudice. Id . Severance should not be granted where less drastic measures, such as curative jury instructions, will suffice. Id . Finally, the Court notes that motions to sever are rarely granted, and a decision to deny such a motion will be reviewed on appeal only for abuse of discretion. Perez, 489 F.2d at 65.
In support of severance, Hoffman points out that the government plans to use Mr. Arata's extrajudicial statements in its case-in-chief, with no assurance that Mr. Hoffman will have the opportunity to cross-examine Mr. Arata at trial. He first invokes the Bruton doctrine, in which the Supreme Court endorsed "a narrow exception" to the general presumption indulged in law, that is, that jurors follow instructions; Bruton holds that "a defendant is deprived of his Sixth Amendment right of confrontation when the facially incriminating confession of a nontestifying codefendant is introduced at their joint trial, even if the jury is instructed to consider the confession only against the codefendant." See Richardson v. Marsh, 481 U.S. 200, 206-08 (1987)(citing Bruton v. United States, 391 U.S. 123 (1968)).
In United States v. Powell, 732 F.3d 361, 376-77 (5th Cir. 2013), the Fifth Circuit comprehensively summarized Bruton and its progeny:
Under the Confrontation Clause, a criminal defendant is guaranteed the right to "be confronted with the witnesses against him." U.S. CONST. amend. VI. The Supreme Court held in Bruton that a defendant's Confrontation Clause rights were violated by the admission of a non-testifying co-defendant's confession that directly implicated the defendant in the criminal act, even though the trial court issued a limiting instruction to the jury. [ Bruton v. United States, 391 U.S. 123, 126 (1968).] The scope of Bruton was later clarified in Richardson v. Marsh , in which the Court found a non-testifying co-defendant's confession constitutionally admissible when it was redacted to include references only to the non-testifying codefendant and a third person, not the defendant, and the trial court gave a limiting instruction to the jury. [ 481 U.S. 200, 203 (1987).] Significant in Richardson is the fact that the confession did not implicate the defendant on its face. Any implication of the defendant in the admitted statement required linkage with other trial evidence. Id. Richardson 's scope was clarified in Gray v. Maryland, 523 U.S. 185 (1998), in which the Court determined that modifying a non-testifying co-defendant's statement by replacing the defendant's name with the term "deleted" or "deletion" is insufficient to avoid implicating the defendant.
The key analytic factor in Richardson is that the statement did not clearly refer to the defendant and could only be linked through additional evidentiary material. In United States v. Vejar-Urias, 165 F.3d 337 (5th Cir. 1999), we determined that a defendant's Confrontation Clause rights were violated when a nontestifying co-defendant's inculpatory statement was altered by using the word "someone" instead of the defendant's name. Our logic tracked the Court in Richardson: "Where... it is obvious from consideration of the confession as a whole that [the statement refers] to the defendant, then admitting it does violate Bruton ...." Id.
Hoffman submits that Mr. Arata made statements in his FBI 302 that may be directly incriminating, specifically refer to him (Mr. Hoffman), and will likely be used by the government not only in support of its false statement charges against Mr. Arata, but also to cross-examine Mr. Hoffman, who says he plans to testify at trial. Because he has no assurance that he will have an opportunity to cross-examine Mr. Arata during their joint trial, Mr. Hoffman insists that the only way to avoid deprivation of his constitutional confrontation clause rights is to sever his trial. The government counters that it attempted to reach an agreement with Peter Hoffman's counsel on Bruton issues, but defense counsel suggested that he did not believe that redaction could cure the Bruton problem. The government submits that Arata's statements are exculpatory and those portions of the statement that cast aspersions on Hoffman can be redacted.
The Court has some concerns regarding whether or not the FBI 302 can be redacted to adhere to the Bruton/Richardson/Gray trilogy, given that many of Arata's statements as memorialized in the FBI 302 refer directly to Mr. Hoffman and can be considered inculpatory in the context of the government's charges. However, even assuming as the Court must, that Mr. Arata will not testify, severance is premature; the Court finds that it may be possible to avoid a Bruton problem and prefers to consider the parties' proposal as to how to cure the potential Bruton problem. Mr. Hoffman has failed to point specifically to inculpating statements in Mr. Arata's 302 as opposed to statements that merely reflect negatively about Mr. Hoffman in Arata's opinion.
Alternative to his Bruton theory of prejudice, Mr. Hoffman submits that, if his trial is not severed from that of Mr. Arata, the potential for transference of guilt or overspill evidence based on the false statement charges implicating only Mr. Arata will prejudice Hoffman, who is not charged with the alleged false statement bad acts. The government counters that the false statement charges against Arata are not the sort of inflammatory, unrelated charges that would "prevent the jury from making a reliable judgment about guilt or innocence" in a joint trial, and a limiting cautionary instruction can solve any potential prejudice. The Court agrees.
In Zafiro v. United States, the Supreme Court held that, where defendants are properly joined under Rule 8(b), "a district court should grant a severance under Rule 14 only if there is a serious risk that a joint trial would compromise a specific trial right of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence." 506 U.S. 534, 538-39 (1993)(declining to endorse a bright-line rule requiring severance whenever co-defendants have conflicting defenses and pointing out that Rule 14 does not require severance even if prejudice is shown). The Court went on to note that the Bruton doctrine presented one such risk of prejudice, but that "the risk of prejudice will vary with the facts in each case" and that, even if there is a high risk of prejudice, "less drastic measures, such as limiting instructions, often will suffice to cure any risk of prejudice." Id. at 539.
Here, putting aside the potential Bruton issue,  Mr. Hoffman fails to persuade at this pre-trial stage that the jury will be unable to reliably judge his guilt or innocence in the context of a joint trial. See id. That Arata is charged with false statements in addition to the charges in common to all three defendants does not make this an exceptional case in which severance is mandated under Zafiro. At this stage, the Court cannot agree that the alleged false statements amount to "specific and compelling prejudice, " or otherwise risk a spillover effect incurable by careful jury instructions. See United States v. Krenning, 93 F.3d 1257, 1267 (5th Cir. 1996); see also United States v. McCrae, 702 F.3d 806 (5th Cir. 2012).
Accordingly, IT IS ORDERED: that Peter and Susan Hoffman's motion to exclude statements by defendant Michael Arata as subject to attorney-client privilege is DENIED in part insofar as they assert a blanket privilege; the Court defers ruling on the motion pending supplemental briefing as to specific communications: by March 25, 2015, Mr. Hoffman must submit supplemental papers identifying precisely which specific communications he asserts are privileged and why,  and by March 31, 2015, the government must file a response directed to those specific communications Mr. Hoffman submits are privileged. IT IS FURTHER ORDERED: that Peter Hoffman's motion for severance is hereby DENIED without prejudice as premature; the Court orders all counsel to submit briefing, along with a proposal for redacting Mr. Arata's FBI 302 so as to avoid offending Bruton, five working days prior to trial. The Court does not, on the present record, wholly accept the government's position that Bruton/Zafiro are not at risk. repeat his briefing, but must so advise the Court and the government.