United States of America, Plaintiff-Appellee-Cross-Appellant v. Walter Matthew Threadgill, Jr. Walter Matthew Threadgill, III Michael Glenn Rigler Timothy Ray Klement Mark Victor Threadgill, Defendants-Appellants-Cross-Appellees

Citations: 172 F.3d 357; 1999 WL 212251Docket: 97-40241

Court: Court of Appeals for the Fifth Circuit; April 13, 1999; Federal Appellate Court

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The United States Court of Appeals for the Fifth Circuit reviewed the convictions and sentences of five defendants involved in an illegal gambling operation in Gainesville, Texas. The defendants, including Walter Matthew Threadgill, Jr. and his sons, along with co-defendants Michael Glenn Rigler and Timothy Ray Klement, faced a fourteen-count indictment returned by a federal grand jury on February 15, 1996. They were charged with conducting an illegal gambling business under 18 U.S.C. § 1955, conspiracy to commit money laundering under 18 U.S.C. § 1956(h), various counts of money laundering under 18 U.S.C. § 1956(a)(1)(A)(i) and (B)(i), and structuring financial transactions to evade reporting requirements under 31 U.S.C. § 5324 (specific to Rigler).

Evidence presented at trial revealed that Walter Threadgill had been operating as a bookmaker since the 1980s, expanding his family-run business into a large-scale gambling operation that processed millions of dollars in bets annually. The operation utilized a windowless building in Gainesville, where bets were taken over the phone and recorded using customized software. All communications with bettors were taped to prevent disputes, and financial dealings often involved checks made out to the alias "Tom Johnson." The Court found no errors in the convictions or sentences and affirmed the lower court's decisions. Additionally, the government filed a cross-appeal regarding a downward departure at sentencing, which was also addressed in the opinion.

Rigler, acting as the accountant for Hesperian Investment Corp., endorsed and deposited checks from a gambling operation into the company's bank account. Hesperian, co-owned by Rigler and Matthew Threadgill, provided small loans in advance of tax returns. Rigler withdrew cash in amounts under $10,000 from this commingled account, distributing the proceeds among the other defendants while using some for operational expenses. Initially charging $500 monthly for his services, Rigler later raised this fee to $700.

In Fall 1994, the Texas Department of Public Safety received anonymous tips about the Threadgills' bookmaking operation, leading to an investigation that uncovered ten telephone lines associated with the operation and extensive phone activity at their location. After rumors of police investigation surfaced in December 1994, the gambling operation temporarily closed and later reopened in a barn owned by an associate. On March 8, 1995, a police search led to the arrests of Paul Smith and Mark Threadgill for organized crime, revealing gambling computers and records.

On April 22, 1995, federal officers executed searches at various locations linked to the operation, uncovering extensive gambling records, betting information, and corporate documents related to Hesperian. During the trial, the jury heard 30 recorded conversations of wagers, testimonies from bettors granted immunity, and details from Smith, who became a government witness. Rigler’s bookkeeper also testified about commingling checks with legitimate funds. The jury convicted the defendants on gambling and conspiracy charges but acquitted them of several money laundering offenses. Rigler was found guilty of unlawful structuring.

The district court sentenced all defendants to 42 months in prison, applying a downward departure under U.S.S.G. 5K2.0, which was uniform despite differing guideline ranges. All defendants appealed their convictions, with Mark Threadgill additionally appealing his sentence, while the government cross-appealed the downward departure ruling.

Defendants argue their convictions should be overturned due to federal agents' use of gambling tax records to obtain search warrants and a grand jury indictment, claiming this infringed upon their Fifth Amendment rights and violated 26 U.S.C. § 4424(c). Walter Threadgill filed a motion to suppress these records, which was adopted by codefendants. The district court held a hearing and denied the motion, leading to the current appeal. The review process involves assessing factual findings for clear error and legal conclusions de novo, favoring the government's evidence.

Federal law mandates that individuals unlawfully accepting wagers must pay an excise tax and maintain daily records of their wagers. However, § 4424(a) prohibits Treasury officials from disclosing tax records, and § 4424(c) restricts their use in criminal proceedings, aligning with the Fifth Amendment's protection against self-incrimination. 

On March 8, 1995, state law enforcement executed search warrants at Smith's property, uncovering various incriminating materials later shared with federal authorities, who then obtained a search warrant leading to additional evidence collection. The defendants argued that the gambling records were intended for tax compliance, thus claiming the federal agents' use violated their rights. The district court found that the evidence in question did not constitute compelled records under tax laws, as the computer records were routinely purged, and the tapes had been overwritten. The court determined that the ledgers served specific accounting purposes unrelated to tax compliance.

The district court determined that the gambling records were maintained to enhance the profitability of the defendants' illegal gambling operation, rather than for compliance with federal tax laws, and this decision was affirmed. The defendants challenged the sufficiency of the superseding indictment regarding the conspiracy charge, which is assessed based on whether each count includes essential elements, is described with clarity, and protects the defendant from double jeopardy. The elements required for a conspiracy to commit money laundering include an agreement among individuals to engage in money laundering and the defendant's knowing participation aimed at furthering this illegal activity. The defendants argued that the indictment was deficient for not alleging their knowledge that the property involved was derived from unlawful activity and that such activity was a felony. However, the court found these arguments unpersuasive, as the indictment adequately referenced the relevant statute and included the necessary elements, clearly informing the defendants of the charges and safeguarding against future prosecutions for the same offense.

The defendants' argument regarding the insufficiency of elements in count two is rejected, as the elements they cite are not part of the conspiracy charge but relate to the offense of money laundering under 18 U.S.C. 1956. Established case law indicates that conspiracy is a separate offense and does not require the inclusion of substantive crime elements. The defendants' challenge to count two on this basis is deemed improper and is dismissed.

Additionally, the defendants assert that the district court's jury instructions were flawed, particularly concerning a "deliberate ignorance" instruction they believe lacked evidentiary support. The review of jury instructions considers whether they accurately reflect the law and appropriately guide jurors on the issues. The court maintains broad discretion in formulating these instructions, and reversal is only warranted if the overall charge misrepresents the law or issues.

During the trial, the defendants contended that they lacked criminal intent due to ignorance of the legality of their gambling activities. The district court instructed the jury that knowledge can be inferred from deliberate ignorance and emphasized that negligence or mistake is insufficient for establishing willfulness or knowledge. This instruction was included in a general section addressing mens rea requirements and applied to all counts in the indictment.

Defendants argue that the district court improperly used a deliberate ignorance instruction, claiming the evidence did not meet the legal requirements for its application. The instruction serves to inform the jury that evidence of a defendant's feigned ignorance can be circumstantial proof of guilty knowledge. It is appropriate only when a defendant asserts a lack of knowledge of guilt, and where evidence suggests a deliberate indifference to the truth. Although such instructions are rarely given, courts have upheld them when sufficient evidence supports their inclusion.

The defendants contend there was no evidence they were subjectively aware that their gambling operation was a felony or that they intentionally avoided this knowledge. However, this argument is flawed as the jury acquitted them on counts related to money laundering, making the relevance of the instruction moot for those counts. Even when considering a broader application of their argument, the evidence indicates that the defendants were aware their actions were illegal and took steps to conceal them.

The court concluded that while the inclusion of the deliberate ignorance instruction was an error, this error was harmless due to substantial evidence of the defendants' actual knowledge of their illegal conduct. Previous rulings support that an error regarding such an instruction does not affect the outcome if there is significant evidence of actual knowledge.

Rigler was the sole defendant convicted of structuring transactions to evade reporting requirements under 31 U.S.C. 5324(a)(3). He appealed, arguing that the deliberate ignorance instruction given during his trial was improper and violated the Supreme Court's decision in Ratzlaf v. United States, which states that a conviction under 5324 requires proof that the defendant "willfully" violated the law with knowledge that their conduct was unlawful. Rigler claimed the government needed to demonstrate he had specific knowledge that his transactions violated 5324, asserting that the instruction allowed for his conviction based merely on general knowledge of the law against structuring. The court disagreed, stating that the jury instructions accurately reflected the law and did not diminish the government's burden as established in Ratzlaf. Specifically, the instructions required proof beyond a reasonable doubt that Rigler structured transactions with the intent to evade reporting requirements while knowing that such structuring was unlawful. Therefore, the court rejected Rigler's claim regarding the deliberate ignorance instruction.

Threadgill argued that his convictions should be overturned due to jury instructions that allegedly amended the superseding indictment, a claim he raised for the first time on appeal. The court applied the plain error standard, which requires a demonstration of actual error, that it was plain, and that it affected substantial rights. After reviewing the case, the court found no plain error.

The Fifth Amendment stipulates that a criminal defendant can only be tried on charges outlined in a grand jury indictment, and any changes to the indictment must come from the grand jury. A constructive amendment occurs when a trial court allows proof of an essential crime element via alternative means not included in the indictment, which is typically deemed prejudicial and a basis for reversing a conviction. However, if a defendant raises a constructive amendment claim for the first time on appeal, the court may choose to deny the claim.

Mark Threadgill's allegations of constructive amendment are deemed weak. He claims that the jury instructions for the conspiracy charge reference money laundering instructions, which include state crimes not mentioned in the indictment. Despite this, the court finds no legal relevance to the alleged constructive amendment regarding the conspiracy charge, as the elements required for conspiracy are distinct from those for money laundering. Thus, any amendment to the money laundering counts does not affect the conspiracy conviction.

Additionally, the defendants argue that the superseding indictment should have been dismissed on the grounds that the gambling, money laundering, and unlawful structuring counts violate the federal Commerce Clause. However, since the defendants were acquitted of the money laundering counts, the court's review is limited to whether the gambling and unlawful structuring counts are consistent with the Commerce Clause. The inquiry will focus on the elements of those offenses.

The crime of illegal gambling requires three elements: (1) a gambling business that is illegal under state law; (2) involvement of five or more individuals in operating the business; and (3) continuous operation for over 30 days or gross revenues exceeding $2,000 in a single day, as outlined in 18 U.S.C. 1955 and United States v. Tucker. For unlawful structuring, the elements include: (1) willful and knowing structuring of a currency transaction; (2) intent to evade reporting requirements; (3) involvement of a domestic financial institution; and (4) knowledge that structuring is unlawful, per 31 U.S.C. 5324 and Ratzlaf v. United States. 

In this case, the indictment and jury instructions align with the statutory language of both offenses. The defendants argue that the charges are constitutionally flawed for not demonstrating a "substantial effect on interstate commerce," as established in United States v. Lopez. They claim that post-Lopez, the federal government must prove this jurisdictional element to prohibit individual conduct. This interpretation is incorrect. 

In Lopez, the Supreme Court invalidated a statute prohibiting firearm possession in school zones, determining it was an unconstitutional exercise of Congress's Commerce Clause power because it did not fall under the channels or instrumentalities of interstate commerce, nor did it regulate an activity that substantially affects interstate commerce. The Court clarified that the proper test requires activities to "substantially affect" interstate commerce. It found that the challenged statute lacked a commercial activity component, a jurisdictional element for case-by-case analysis, and specific congressional findings to support claims of substantial effects on interstate commerce.

Defendants argue that the case creates a new jurisdictional requirement for federal prosecutions, necessitating proof that charged conduct "substantially affected" interstate commerce. The court disagrees, clarifying that while *Lopez* limits Congress' ability to regulate certain intrastate activities, it does not establish a broader rule requiring this proof. The relevance of "substantial effect on interstate commerce" arises only when there’s doubt about Congress' regulatory power under the Commerce Clause, which does not apply in this case. The gambling and unlawful structuring statutes pertain to commercial activities, and evidence suggests the defendants engaged in substantial interstate activity.

Klement contends that the gambling count in the indictment is defective for failing to cite the specific state statute violated, as required by 18 U.S.C. § 1955(b). The court applies a de novo standard for sufficiency but emphasizes that post-trial challenges must be viewed with a presumption of validity unless the indictment fails to charge an offense reasonably. The indictment followed the language of § 1955, detailing that the defendants operated a "bookmaking business" violating Texas law. Although the Texas statute was not specifically cited, the Federal Rules of Criminal Procedure state that such omission does not warrant reversal unless it misled the defendant. The court affirms that an indictment must allege essential elements of the offense to allow the defendant to prepare a defense and invoke double jeopardy. The test for sufficiency focuses on constitutional standards rather than perfection in drafting. The Texas Penal Code only criminalizes bookmaking in a limited context.

The superseding indictment clearly charged the defendants with "bookmaking," thereby providing sufficient notice of the violation of § 47.03 of the Texas Penal Code, and Klement was not prejudiced by the indictment's lack of explicit statutory citation. Consequently, Klement's challenge to count one of the indictment is rejected. In the government's cross-appeal, it contests the district court's decision to impose lesser sentences for each defendant. Generally, district courts must adhere to the Sentencing Guidelines unless unusual circumstances arise, as recognized by the Sentencing Commission. The Commission allows for departures from the guidelines when atypical cases present significant differences from the norm. The statutory framework includes § 3553(b), permitting departures based on aggravating or mitigating circumstances not adequately considered by the Commission. The government argues that the facts of this case do not justify the district court's finding that it was "outside the heartland" of money laundering cases. Analyzing the district court's departure involves three determinations: 1) whether the factors for departure are permissible under the Guidelines, 2) whether those factors, supported by record evidence, justify the case being outside the heartland, and 3) whether the degree of departure is reasonable. The current appeal primarily addresses the first two determinations.

An appellate court must first assess if a factor used by the district court is permissible for departure under the Sentencing Guidelines. A district court may depart based on factors "not adequately taken into consideration" by the Sentencing Commission. The determination of whether a factor has been adequately considered involves examining if it is forbidden, encouraged, discouraged, or unmentioned in the Guidelines. If a factor is expressly forbidden, it cannot be used for departure. The Sentencing Commission limits only a few factors, allowing other considerations unless explicitly prohibited. If a factor is encouraged, a court may depart only if the applicable Guideline does not account for it. For discouraged factors or encouraged factors already considered, departure is permissible only if the factor is present to an exceptional degree. For unmentioned factors, courts must analyze whether they sufficiently distinguish the case from the Guideline's "heartland." An impermissible factor includes forbidden factors, discouraged factors not present exceptionally, or encouraged factors already taken into account. The Koon decision establishes these classifications as the basis for evaluating permissible grounds for departure. The degree of deference given to a district court's decision also varies based on the nature of the question presented.

When reviewing a district court's decision to depart from sentencing guidelines, appellate courts differentiate between legal and factual questions. Legal questions, such as the permissibility of a departure factor, receive no deference from the appellate court. In contrast, factual questions warrant substantial deference, as they involve the district court's discretion in evaluating unique circumstances. Most departure cases are fact-based, requiring appellate courts to respect the district court's nuanced judgment regarding the unusualness of a case. 

Before a departure is allowed, the appellate court must ascertain whether the circumstances are so atypical that they fall outside the heartland of cases envisioned by the Sentencing Commission. The district court is deemed to have a comparative advantage in making these determinations due to its direct experience with the case's specifics. Ignoring this advantage could undermine the Sentencing Commission's understanding of trial judges' responses to particular cases. Overall, Koon emphasizes that appellate courts should grant considerable deference to district courts when evaluating departure decisions.

The district court has primary authority to determine whether specific factors justify a departure from standard sentencing guidelines, and its decisions warrant significant deference. In the current case, the district court identified two permissible factors: the defendants’ money laundering activities were incidental to a gambling operation, and their conduct was atypical as they did not use the laundered money for further criminal activities. This led to a downward departure in sentencing under U.S.S.G. 5K2.0, with each defendant receiving 42 months imprisonment.

In reviewing this decision, it is necessary to first assess whether the district court's cited factors are permissible according to the Guidelines Manual. As neither factor is explicitly mentioned as forbidden, the court is not categorically precluded from considering them. The government challenges the first factor, referencing a past case, United States v. Willey, which suggested that a downward departure is not justified if the crime is a minor part of overall conduct. However, Willey is deemed inapplicable here, as it involved an appeal against a refusal to grant a departure, which does not provide grounds for appeal. Moreover, the precedent set in Koon clarifies that the Sentencing Commission intended to limit only a few factors and not to impose a blanket restriction on all other considerations. Thus, Willey no longer holds as binding precedent when conflicting with Koon, aligning with the Sentencing Commission's intent.

The Commission allows flexibility in determining grounds for departure from sentencing guidelines, with a few exceptions. The guidelines aim to help district courts address unusual cases beyond typical offenses. In this context, the district court's use of factors relating to the incidental nature of money laundering to gambling was deemed permissible. The court's findings indicated that this case did not fit the typical money laundering profile, as only $500,000 was laundered from over $20 million in gross wagers, and the laundered funds were not used for further criminal activity. The district court also aligned its decision with the statutory purposes of sentencing, aiming to reflect the seriousness of the offense and promote respect for the law. Importantly, the court utilized the offense levels for money laundering as a baseline, departing to an offense level of 21, which was significantly higher than the base level for illegal gambling. The court's approach was not based on dissatisfaction with the guidelines but rather on a considered evaluation of the case’s unique facts. Given the district court's expertise in factual determinations related to departure, the appellate court deferred to its findings and did not substitute its judgment.

The district court's decision to find the facts of the case atypical and allow for a downward departure from sentencing guidelines was upheld, confirming that such discretion is inherent to the role of the sentencing judge. The court emphasized the importance of treating each defendant as an individual and assessing each case uniquely, as highlighted in Koon v. United States. The judges affirmed the convictions and sentences of the defendants, rejecting claims of a denied fair trial and insufficient evidence for one defendant's conspiracy conviction. The arguments regarding withdrawal from the conspiracy and minor participation were also dismissed as lacking merit. Circuit Judge Edith H. Jones dissented regarding the downward departure, arguing that the defendants' actions fell within the typical range for money laundering offenses. She pointed out that the Sentencing Guidelines aim to classify typical cases, allowing departures only under specific unusual circumstances. Jones reiterated the four questions established by the Supreme Court in Koon for determining the atypical nature of a case concerning departures from guidelines.

District courts are required to present compelling facts to justify departures from sentencing guidelines, particularly when such departures are based on factors not specified in the guidelines. In this case, the district court claimed that the defendants' money laundering was "incidental" to gambling and did not involve recirculating laundered funds back into the gambling operation. However, these claims are not supported by the guidelines, which emphasize that departures on such grounds should be rare. The court's perspective that laundering half a million dollars is "incidental" is challenged, citing that even a small amount laundered in a different case resulted in a significantly longer sentence. The defendants employed classic money laundering techniques, further undermining the district court's reasoning. A more appropriate comparison would be between the laundered amount and the total potential profits rather than the overall betting scheme. The majority's argument that criminal organizations launder both profits and gross revenues does not align with the district court's assessment of the laundering being insignificant. Lastly, the assertion that the defendants did not use laundered money for other criminal activities is criticized as unrealistic, given the typical motivations behind operating an illegal gambling operation.

An illegal gambling conspiracy can generate profits for personal use rather than for further criminal activities, which does not remove its actions from the realm of typical money laundering cases. The Money Laundering Control Act of 1986 was enacted to address the concealment of illicit gains and criminalize transactions that facilitate federal crimes, including illegal gambling. The appellants' gambling operation, involving substantial cash collections and complicity with an accountant to evade bank reporting requirements, fits within the scope of the Act. The district court failed to articulate specific facts that would justify a deviation from established sentencing guidelines for money laundering, which typically involve large-scale operations. The case is characterized by common practices in money laundering, leading to a dissent against the majority’s decision to allow a downward departure in sentencing. Additionally, the passage references legal provisions regarding the confidentiality of tax-related documents and the limitations on their use in criminal proceedings against taxpayers.

An open question exists in the Circuit regarding whether conspiracy to commit money laundering under 18 U.S.C. § 1956(h) necessitates proof of an overt act. The Supreme Court has determined that an overt act is not required for conspiracy to commit drug offenses under 21 U.S.C. § 846, and the language of both statutes is nearly identical. However, neither the Supreme Court nor the Circuit Court has definitively ruled on the overt act requirement for § 1956(h). Despite this uncertainty, count two of the superseding indictment alleges multiple overt acts attributed to the defendants. The defendants challenged this count in a joint motion to dismiss, asserting that the jury instructions were defective, which was rejected by the court.

The defendants raised concerns regarding the deliberate ignorance instruction, which were also objected to timely. Following the Supreme Court's decision in Ratzlaf, Congress enacted 31 U.S.C. § 5324 in 1994, clarifying that knowledge of the law against structuring is not required for conviction, focusing instead on the intent to evade reporting requirements. The defendants did not provide case law supporting their interpretation related to Lopez.

Additionally, 18 U.S.C. § 1955 includes a jurisdictional element ensuring a sufficient nexus on a case-by-case basis, and the gambling statute is backed by congressional findings affirming its constitutionality. Prior to the Supreme Court's Koon decision, the Circuit used a two-step approach for reviewing sentences based on a legal violation or incorrect application of the Guidelines and whether the sentence represented an unreasonable departure from the guideline range, with Koon elaborating on the first step.

The opinion refines a two-step approach to sentencing, emphasizing deference to the district court's findings. The government argues that the district court erred by comparing laundered money to total wagers rather than to the gambling organization's likely profits of around $1,000,000. The court rejects this argument, stating that criminal organizations launder both profits and gross revenues. The government also contends that most money laundering cases involve a single specified unlawful activity, a claim the court acknowledges but maintains that the district court's judgment warrants substantial deference. Ultimately, the court finds the district court's decision to depart from sentencing guidelines reasonable and balanced. The government further claims that the appellants could not have laundered the full $20 million due to their business model, which includes a 10% fee on losing bets, suggesting that even with equal wagers, they would net only $1 million from $20 million in wagers.