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Case 0:10-cr-60194-JIC Document 716

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA CASE NO. 10-60194-CR-COHN UNITED STATES OF AMERICA, v. JOSEPH GUARACINO, et. al, Defendant. _______________________________/ GOVERNMENTS MOTION IN LIMINE TO PRECLUDE EVIDENCE AND ARGUMENT REFERRING TO LACK OF ACTUAL RELIANCE, LENDER NEGLIGENCE, OR THE PRESENT FORECLOSURE CRISIS The United States of America, by and through the undersigned Assistant United States Attorney, hereby respectfully moves in limine for an order precluding the defendants from presenting evidence of, or argument referring to, (1) any lack of actual reliance by the victim mortgage lenders on the defendants misrepresentations; (2) any purported or actual negligence by victim mortgage lenders; or (3) the present foreclosure crisis and the Governments action in seeking to resolve the foreclosure crisis, whether in opening statement, direct or cross-examination, closing argument or otherwise.1 Such evidence and argument is irrelevant under clear Eleventh Circuit law in determining the defendants guilt and would serve only to create an unnecessary, and prejudicial, sideshow. In support of its motion, the United States states as follows. I. INTRODUCTION The Indictment in this case charges the defendants with conspiracy to commit mail and wire fraud (18 U.S.C. 1349) and substantive counts of mail fraud (18 U.S.C. 1341), wire fraud (18

The United States sought the defendants position on this motion. By the time of filing, six defense counsel had responded, all indicating their opposition to the motion.

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U.S.C. 1343), and making false statements within the jurisdiction of HUD (18 U.S.C. 1001).2 These charges all stem from a scheme to fraudulently obtain mortgage loans from various mortgage lenders by submitting mortgage loan applications, HUD-1 forms, and other supporting documents containing materially false statements, including, for example, misrepresentations regarding the defendant borrowers employment, income, source of funds, and intent to occupy the properties to be purchased as their primary residences. Certain defendants, through their filings and arguments in court, have signaled an intent to present evidence and argument suggesting that the mortgage lenders from whom the defendants fraudulently obtained loans, or the employees of those lenders, (1) did not actually rely on the defendants false statements; (2) did not care whether the defendants representations were true; (3) knew the defendants statements were false; (4) should have known the defendants statements were false; or (5) were negligent in not discovering that the defendants statements were false. Under the defendants theory, these allegations would be relevant to the issue of materiality. For example, Defendant Steven Stoll, in his Response in Opposition to Homecomings Financial Networks Motion to Quash Subpoena [DE # 661] described some of the documents sought as documents and information purportedly relied on by Homecomings in approving loans, thus suggesting that Homecomings (a lender) did not actually rely on those documents. Id. at p. 5 (emphasis added). That response also attached an email as an example of communication purportedly showing that Homecomings invited submission of false information on stated income loans and was complicit[] in thwarting or avoiding its own purported underwriting criteria. Id.

Two defendants, Steven Stoll and Stephen Orchard, are also charged with one count of obstruction of justice (18 U.S.C. 1512(b)(3)). 2

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at p. 5-6. Defendant Casey Mittauer, in his Motion to Preclude Expert Testimony for the Purpose of Proving Materiality [DE #371 at p. 4] and his reply on that motion [DE #507, at p.5], similarly argued, with regard to materiality, that lenders may not have relied on the false statements in the loan applications and had little incentive to rely on the statements because the loans would be re-sold on the secondary market. Defendant Stolls counsel, at the hearing on the aforementioned Motion to Quash, summarized his position regarding reliance and materiality by arguing that one could not defraud a person who knows he is receiving false information or does not care if the information is true or false. However, Eleventh Circuit law clearly indicates that these arguments are not valid defenses to materiality. Their true purpose is to shift the focus of the trial from the misrepresentations and misconduct of the defendants to the business practices of the mortgage lending industry and the resulting foreclosure crisis. In doing so, the defendants would not only fail to make legitimate arguments regarding the materiality of their misrepresentations, they would greatly expand the issues at trial and essentially invite the jury to decide their verdict based on anger or contempt for the lending industry, rather than the defendants misconduct. II. ARGUMENT A. The Court Should Preclude Any Evidence or Argument Suggesting That Defendants Misrepresentations Were Not Material Because a Particular Lender Subjectively Did Not Rely Upon Such Misrepresentations. There is no defense that misrepresentations were not material because a particular lender did not subjectively or actually rely on the misrepresentations. [A] false statement is material if it has a natural tendency to influence, or [is] capable of influencing, the decision of the decisionmaking body to which it was addressed. Neder v. U.S., 527 U.S. 1, 16 (1999) (internal

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quotation omitted). On remand from the Supreme Court, the Eleventh Circuit held that: Because the issue is whether a statement has a tendency to influence or is capable of influencing a decision, and not whether the statement exerted actual influence, a false statement can be material even if the decision maker did not actually rely on the statement. United States v. Neder, 197 F.3d 1122, 1128 (11th Cir. 1999). In fact, a false statement can be material even if the decisionmaker actually knew or should have known that the statement was false, United States v. Johnson, 139 F.3d 1359 (11th Cir. 1998), or even if the false statement was ignored. United States v. Gray, 367 F.3d 1263 (11th Cir. 2004). See also United States v. Boffil-Rivera, 607 F.3d 736, 741-42 (11th Cir. 2010) (statement need not be relied upon or even read in order to be material). While the defendants claim that a statement cannot be material if the victim did not believe or rely on it may have some rhetorical appeal, courts have rightfully rejected the argument, by remembering the focus of the fraud statutes and the materiality requirement. The relevant question is the objective tendency or capability of a false statement to influence a decision, and not the subjective or actual reliance on that statement by the victim, because the focus of the criminal statute is on the behavior and intent of the criminal perpetrator, not the victim. Because the focus of the mail fraud statute, like any criminal statute, is on the violator, the purpose of the element of materiality is to ensure that a defendant actually intended to create a scheme to defraud. United States v. Svete, 556 F.3d 1157, 1165 (11th Cir. 2009). Similarly, the materiality requirement does not exist to put the victims intent, knowledge or behavior at issue. Rather, [t]he purpose of the materiality requirement is to insure that the reach of 1001 is confined to reasonable bounds and not allowed to embrace trivial falsehoods. Johnson, 139 F.3d at 1364-65 (quoting United States v. Gafyczk, 847 F.2d 685, 691 (11th Cir. 1988)). 4

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The theories on materiality that the defendants want to advance have been squarely rejected by the Eleventh Circuit. Defendants Stoll and Mittauers aforemetioned filings suggest the following theory: the mortgage lenders knew that the stated income/stated asset loan applications they were receiving contained false statements, or knew that such false statements were likely since no verification was required, but the lenders did not care because any approved loans would be quickly sold to secondary investors who would suffer the consequences if any unqualified borrowers ultimately defaulted. Thus, the defendants would argue, the lenders motivation was to approve as many applications as possible, whether true or not, in order to sell as many loans as possible. Based on his citation to the Homecomings email in his aforementioned Response, Defendant Stoll appears to believe that lender employees were eagerly soliciting applications with false information in order to maximize the number of loans that could be re-sold.3 Thus, defendants would argue, because the lenders did not care if the application statements were true, or perhaps even had employees who solicited applications that likely had false statements, the false statements could not have been material. The theory that false statements are not material because the recipient did not care about the truth, and thus did not actually rely on the statements, has been rejected by the Eleventh Circuit. In Johnson, the defendant applied to the Department of Commerce for a license to export zirconium. In his license application, the defendant indicated that the mineral would be used for industrial purposes, when in truth it was being sold to an arms merchant to fuel bombs to be sold to Iraq during the Iraq-Iran war. Johnson, 139 F.3d at 1362. Charged with false statements under 18 U.S.C.

The United States does not concede that this argument is theoretically or factually accurate. However, even if correct, defendants theory has been rejected by the Eleventh Circuit. 5

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1001, among other charges, the defendants theory was that his false statements were incapable of influencing the government because the CIA had a covert interest in assisting Iraqs war effort. Id. at 1364. That argument is analogous to the instant defendants arguments that, regardless of what their underwriting requirements may have been, the lenders had an interest in approving and reselling as many loans as possible, and thus a covert policy of approving applications despite a likelihood of false statements. The Johnson court flatly rejected the notion that materiality could be defeated by claiming that it was consistent with an unwritten policy of the entity receiving the false statement (in that case, the government). Id. The court emphasized that actual knowledge of falsity is not a defense to the materiality requirement and found that the statements were material because the plain meaning of the false statements would have influenced the decision whether or not to authorize a license. Id. A similar argument was rejected in United States v. Yeager, 331 F.3d 1216 (11th Cir. 2003). There, a pharmaceuticals distributor misrepresented to a drug manufacturer that his business was only selling the manufacturers drug to its own patients, not other distributors and wholesalers. Id. at1219-1220. Yeager argued that the victim drug manufacturer did not care whether Yeager adhered to his agreement to only sell to certain patients because the manufacturer wanted to flood the market and make as much profit as possible before losing its patent. Thus, Yeager reasoned, the manufacturer could not have actually relied on his misrepresentations to the contrary. Id. at 1221. Again, this is analogous to the defendants argument here that the lenders did not care whether mortgage applicants were providing truthful information because the lenders really just wanted to approve and sell as many loans as possible. Once again, the Eleventh Circuit rejected the argument because actual reliance has no place in a prosecution for federal mail fraud. Id. at 1222.

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The Eleventh Circuit has also rejected the notion that there is no materiality where the recipient knew the statements were false, or even encouraged the statements to be false, in Neder. Neder involved several different fraudulent schemes by which defendant Neder sought to deceive real estate lenders; on remand from the Supreme Court, the Eleventh Circuit evaluated whether a reasonable jury could have found a lack of materiality. The first scheme was a land-flipping scheme whereby Neder had a nominee corporation he controlled simultaneously buy a piece of land and then sell it to a partnership he controlled at a highly inflated price. Neder, 197 F.3d at 1125. Neder would obtain a loan for the inflated price and pocket the difference between the loan amount and the lands original purchase price, without disclosing his interest in the selling corporation, the original price the corporation was paying for the land, the fact that he was keeping the excess loan proceeds in a personal account, and other pertinent information. Id. Just as the defendants in the instant case want to argue that the lenders knew or did not care what statements were made in their loan applications, Neder argued that the lenders either knew or should have known that Neder was land-flipping and appropriating the loan proceeds for personal use. See id. at 1130. Just as the defendants here will likely claim or attempt to present evidence that stated income mortgage applications were rife with false statements during the housing boom, Neder introduced evidence that his land-flipping practices were common in the 1980s and argued that lenders had a duty to investigate whether Neder was engaging in such practices. See id. Just as the defendants here argue that their misrepresentations were not material because the lenders would not suffer the consequences of defaults (and thus need not rely on the misrepresentations), Neder argued that his statements were not material because he personally guaranteed his loans, fully securing the lenders. Id. The Eleventh Circuit rejected these arguments because they are really about what the lenders

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knew or should have known and whether the lenders reasonably relied on Neders representations not whether Neders representations were material. Id. By this reasoning, in the instant case whether lenders knew or should have known that the defendants applications contained misrepresentations does not affect whether those misrepresentations were material. Neder also rejected the defendants materiality argument in the more nefarious situation where the lenders employees allegedly actively solicited false information. In one of Neders schemes, he submitted false invoices to a lender falsely representing that he had paid for construction work on a property. Neder presented evidence that two of the lenders representatives had authorized and encouraged Neder to make false construction draw requests and knew that he was doing so. Id. at 1133. Neder thus argued that, had the jury believed that the lender employees knew Neders statements were false but disbursed the funds anyway, the jury could have found that the representations did not actually influence the lender and thus were not material. Id. Again, the Court rejected this argument, finding that a statement can be material even if the decision maker is not actually influenced and knew the statement was false.4 Id. [W]hat is relevant to materiality is whether the statements have a natural tendency to influence, or are capable of influencing, the decision of the decisionmaking body to which they are addressed. Id.

The Neder Court did indicate that arguments about whether the lenders employees had encouraged the submission of the false statements could relate to the defendants intent, rather than materiality. 197 F.3d at 1133. However, awareness of, or even participation in, fraud by lender employees is not a defense to fraud because it is the institution that is defrauded, not the individual. United States v. Rackley, 986 F.2d 1357, 1361 (10th Cir. 1993) (owner/director of banks knowledge of fraud not determinative of bank fraud charges because the statute protects the financial institution, not the institutions directors or agents); United States v. Gallant, 537 F.2d 1202, 1224 (10th Cir. 2008) (participation of bank directors and officers did not negate culpability of bank fraud defendant); United States v. Jimenez, 513 F.3d 62, 74 (3d. Cir. 2008) (no defense to bank fraud that account holder colluded with bank officer). 8

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Because it is not relevant to materiality whether the lenders cared about the truth or falsity of the defendants statements, whether the lenders knew or should have known the statements were false, whether the lenders actually relied on the statements being true, or even whether their employees might have encouraged them to be false, the Court should prohibit the defendants from presenting evidence or argument on these issues. Federal Rule of Evidence 401 defines [r]elevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would without the evidence. Fed. R. Evid. 401. In other words, for evidence to be relevant (1) [t]he evidence must be probative of the proposition it is offered to prove, and (2) the proposition to be proved must be one that is of consequence to the determination of the action. United States v. Glasser, 773 F.2d 1553, 1559 n.4 (11th Cir. 1985) (quotation omitted). If the evidence does not meet both of these relevancy requirements, then Rule 402 says that it is not admissible. Fed. R. Evid. 402. As the above analysis shows, even if the defendants could prove that the mortgage lenders did not care, did not actually rely on, or actually disbelieved the defendants false statements, those propositions would not make the determination of their materiality more or less likely. See United States v. Biesiadecki, 993 F.2d 539, 544 (7th Cir. 1991) (affirming district court's decision precluding testimony from customers who were not misled by defendant's statements; holding that the excluded testimony of the other . . . customers would have improperly shifted the jury's attention away from the knowledge and intent of [the defendants] and focused instead on the beliefs of the victims of the alleged scheme to defraud.) Thus, evidence of such propositions would not be relevant. Because it would not be relevant, such evidence and argument would serve only to confuse or inflame the jury.

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B.

The Court Should Preclude Any Evidence or Argument Suggesting that the Victim Financial Institutions Invited or Could Have Prevented the Fraud. Just as there is no lack of actual reliance defense to materiality, there is similarly no

legitimate defense to mortgage fraud that the mortgage lenders were negligent or could have discovered the falsity of the defendants misrepresentations. Thus, any negligence by the mortgage lenders is irrelevant, and the Government respectfully requests that the Court preclude the defendants from presenting evidence or argument suggesting that the victim mortgage lenders were negligent or could have been more diligent, in their dealings with the defendants. As the Eleventh Circuit has held, whatever role, if any, a victims negligence plays as a bar to civil recovery, it makes little sense as a defense under a criminal statute that embraces any scheme or artifice to defraud. United States v. Svete, 556 F.3d 1157, 1165 (11th Cir. 2009) (emphasis in original). Put another way, [t]he negligence of the victim in failing to discover a fraudulent scheme is not a defense to criminal conduct. United States v. Coyle, 63 F.3d 1239, 1244 (3d Cir. 1995) (cited by United States v. Davis, 226 F.3d 346, 358-59 (5th Cir. 2000)). See also United States v. Moore, 923 F.2d 910, 917 (1st Cir. 1991) (approving jury instruction that it is not a defense that the bank might have prevented its losses had it had better internal controls or procedures.); United States v. Callipari, 368 F.3d 22, 37 (1st Cir. 2004) (approving of exclusion of cross-examination that suggested victim bank was responsible for loss) (vacated on other grounds); United States v. Serfling, 504 F.3d 672, 679 (7th Cir. 2007) (approving exclusion of expert testimony that investigation by mortgage lender would have prevented loan from closing). Based on their prior arguments, the defendants may present a variant of the argument refuted in part A, supra: even if the mortgage lenders did not purposefully, knowingly, or intentionally solicit applications with false statements, marketing loans that required only a statement of income 10

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or assets or other information without verification or investigation invited or foolishly ignored the likelihood of false information being provided. In other words, the lenders were negligent or reckless in offering these types of loans. However, again, because the focus of the mail fraud statute, like any criminal statute, is on the violator, the purpose of the element of materiality is to ensure that a defendant actually intended to create a scheme to defraud. Svete, 556 F.3d at 1165. Since the negligence of the victim is not a defense to a criminal fraud charge, the defendants should be precluded from referring to it at trial. This criminal case is similar to United States v. Falkowitz, 214 F. Supp. 2d 365 (S.D.N.Y. 2000). In Falkowitz, the defendants were charged with mail fraud for orchestrating an insurance fraud scheme. The defendants exploited a perceived weakness in the insurance underwriting process to perpetrate the scheme. In order for the scheme to be successful, defendants recruited HIV positive patients to intentionally misrepresent that they were in good health and purchase insurance policies for which they would not otherwise qualify. Id. at 370-71. The defendants would then purchase the fraudulently obtained policies, market the policies to investors and make a profit from the policies. Id. Defendants sought to dismiss the indictment on the grounds that they did not defraud the victims because the misrepresentations made were apparent and related to matters that the insurance companies could easily confirm through readily available external sources and that, though having the affirmative obligation to investigate, the insurers chose not to examine. Id. at 374. The district court denied the motion, discussing at length the federal criminal fraud statutes, and stating plainly that the statutes explicitly hinge on the existence of a scheme intended to defraud using mail or wire means to further the deceptive purpose. Id. at 379 (citations omitted).

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The statutes are intended to punish the scheme to defraud and do not require that the intended victim actually have been intentionally defrauded, nor that any private injury or damage be proved. Id. at 380. Even if the insurers could have discovered the fraud in the insurance policy applications which misrepresented patients health, any failure by the insurers to do so was held to be immaterial to the scheme to defraud. Id. at 383 (Whether or not the insurers were imprudent in not demanding medical examinations of their customers, or comprehended that the applications may have contained false information, is immaterial to the existence of Defendants artifice or to their fraudulent purpose.). Id. The actions of the instant defendants themselves in helping to conceal their fraud from the mortgage lenders further demonstrate the need to preclude defendants from introducing this type of comparative negligence evidence. For example, in some instances the defendants submitted false documents, such as falsified verifications of employment, false lease agreements showing the borrowers primary residence being rented, and false occupancy agreements to support the misrepresentations in their loan applications and HUD-1 forms. In sum, the lenders actions are irrelevant to whether the defendants perpetrated a scheme to defraud on the lenders, and therefore, the defendants should be precluded from referring to any perceived or actual negligence, complicity, or lack of diligence by the victim mortgage lenders. C. The Court Should Preclude the Defendants from Referring to the Foreclosure Crisis and the Governments Actions in Seeking to Resolve the Crisis. The present foreclosure crisis including its causes, its effects, and any Government action, whether at the federal or state level, to resolve the crisis is irrelevant to whether the defendants participated in a scheme to defraud mortgage lenders. Conduct in 2009 and 2010 is not relevant to the issue of whether the defendants participated in a scheme to defraud in 2004 through 2008. 12

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Therefore, it is inadmissible under Federal Rule of Evidence 401.

Even if the Court were to deem

the evidence admissible, it should still be excluded under Federal Rule of Evidence 403. The only purpose of presenting evidence of the present foreclosure crisis is to mislead the jury and confuse the issues that the jury will be wrestling with during trial. This is particularly true for arguments that the lenders conduct led to the current foreclosure crisis be it a suggestion that the lenders knew or did not care about misrepresentations in mortgage applications or were negligent in failing to catch misrepresentation.5 Under Federal Rule of Evidence 403, this evidence should be excluded. Federal Rule of Evidence 403 provides in relevant part that [a]lthough relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. Fed. R. Evid. 403. Exclusion for risk of unfair prejudice, confusion of issues, misleading the jury, or waste of time, all find ample support in the authorities. Id., Advisory Committee Notes on 1972 Proposed Rules. The Eleventh Circuit, while noting that the application of Rule 403 must be sparing, has said that the rules major function is limited to excluding matter of scant or cumulative probative force, dragged in by the heels for the sake of its prejudicial effect. United States v. Meester, 762 F.2d 867, 875 (11th Cir. 1985). Rule 403 is meant to relax the iron rule of relevance, to permit the trial judge to preserve the fairness of the proceedings by exclusion despite its relevance. Id. The same analysis applies to any references to the United States of Americas actions, through its agencies, to alleviate or ameliorate the crisis. Any mention of the role the Federal Reserve, the Securities and Exchange Commission, the FDIC, Fannie Mae, Freddie Mac, or any

Surely, were the government to argue that the conduct of the defendants was part of the cause of the foreclosure crisis, the defendants would immediately object that the government was improperly attempting to inflame the passions of the jury. 13

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other entitys role in dealing with and managing the crisis, including bailouts to lenders or the resolution of pending civil and criminal charges, is an attempt to include a matter of scant . . . probative force, dragged in by the heels for the sake of prejudicial effect. United States v. Utter, 97 F.3d 509, 514-515 (11th Cir. 1996). III. CONCLUSION For the foregoing reasons, the Court should preclude the defendants from presenting evidence or argument regarding any lack of actual reliance on the defendants misrepresentations and any purported or actual victim negligence, at any point during trial, including opening statements and closing arguments, as irrelevant and/or unduly prejudicial. In addition, any mention of the present foreclosure crisis and the Governments action in seeking to resolve the foreclosure crisis, should be excluded as irrelevant and/or unduly prejudicial. Respectfully submitted, WIFREDO A. FERRER UNITED STATES ATTORNEY

BY:___s/ Jared M. Strauss___________________ JARED M. STRAUSS ASSISTANT UNITED STATES ATTORNEY Court ID No. A5501264 99 N.E. 4th Street, 6th Floor Miami, Florida 33132-2111 (305) 961-9062 (telephone) (305) 536-4699 (fax) jared.strauss@usdoj.gov

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CERTIFICATE OF SERVICE I HEREBY CERTIFY that on the 21st day of January, 2011, the undersigned electronically filed the foregoing document with the Clerk of the Court using CM/ECF.

s/ Jared M. Strauss JARED M. STRAUSS Assistant United States Attorney

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