Willful Blindness Instructions in Criminal Tax Cases: The Third Circuit's Stadtmauer Ruling

Willful Blindness Instructions in Criminal Tax Cases: The Third Circuit's Stadtmauer Ruling

By Jeremy D. Frey (White Collar and Corporate Investigations Practice) and Paul D. Pellegrini (Tax Practice)

In United States v. Stadtmauer, 620 F.3d 238 (3d Cir. N.J. 2010), the Third Circuit Court of Appeals recently upheld a willful blindness jury instruction that applied to a defendant's knowledge of the law in a criminal tax case, making it easier for federal prosecutors to obtain convictions for tax crimes. The Stadtmauer ruling comes at a time when the criminal defense bar is continuing to raise the alarm that willful blindness instructions confuse juries by seemingly permitting conviction based merely on a defendant's recklessness or even negligence with respect to knowledge of material facts or the law.

Background

The central issue in Stadtmauer was whether the Supreme Court's ruling in Cheek v. United States, 498 U.S. 192 (U.S. 1991) prohibited a jury instruction on willful blindness. In Cheek, the defendant, who failed to file or pay his taxes, asserted that any conviction required proof beyond a reasonable doubt that he acted knowingly and willfully, and that he did not act willfully since he believed that the federal tax system was unconstitutional. The trial court instructed the jury that only "an objectively reasonable good-faith misunderstanding of the law would negate willfulness." Cheek v. United States, 498 U.S. 192, 196. The Supreme Court reversed Cheek's ensuing conviction, and held that even a subjective mistake by a defendant negates willfulness in a tax case, regardless of whether the mistake was objectively reasonable.

Stadtmauer

In Stadtmauer, the defendant was charged with, among other things, aiding the willful filing of materially false or fraudulent partnership tax returns. In its jury instructions, the district court gave a willful blindness instruction. The instruction stated the jury could find the defendant had the requisite mental state if he (1) was aware of a high probability that the tax returns at issue were false or fraudulent as to a material matter and (2) consciously and deliberately tried to avoid learning about this fact. The instruction also stated the jury could not find the required mental state if there was proof only that the defendant should have known that the tax returns at issue were false as to a material matter, or that a reasonable person would have known of a high probability of that fact.

The Third Circuit Court of Appeals upheld the district court's willful blindness instruction. In its decision, the court analyzed Cheek to distinguish between (1) a person with "actual knowledge" of a legal duty; and (2) a person who, in good faith, is ignorant of the duty, misunderstands it, or believes it does not exist. It held that one who deliberately avoids learning of a fact does not fall into the latter category because the person is not acting in good faith. Instead, the defendant is imputed knowledge of the fact and, consequently, falls into the former category.

The Third Circuit found that generally to act "knowingly" means to act with an awareness of the high probability of the existence of a fact. When such awareness is present, "positive" knowledge is not required. The court went on to find that "we see nothing in Cheek-which did not involve a willful blindness instruction-that suggests the Supreme Court intended to exempt criminal tax prosecutions from this general rule." United States v. Stadtmauer, 620 F.3d 238, 253. The Third Circuit found no difference between deliberate avoidance of knowledge as to issues of material fact and relevant issues of law, but made explicit that willful blindness instructions relate only to proof of a defendant's "knowledge" and not to specific intent. In so ruling, the Third Circuit now joins the First, Eighth, and Eleventh Circuits in concluding that a willful blindness instruction that applies to a defendant's knowledge of tax law does not run afoul of Cheek.

Pepper Perspective

For many criminal defendants, the giving of a willful blindness instruction to a jury can mean the difference between going home or going to jail. An example is now pending before the Second Circuit Court of Appeals in the non-tax, Foreign Corrupt Practices Act prosecution of handbag manufacturer Frederic Bourke.

Bourke was charged with aiding foreign bribes paid by a promoter, nicknamed the "Pirate of Prague," in seeking to purchase the Azerbaijani national oil company. Bourke, an investor in the venture, claimed that he had no knowledge of the payment of bribes, that he was a victim who lost his investment, and that he alerted the FBI once he became aware that the Pirate of Prague might be paying overseas bribes. The trial court gave a willful blindness instruction, and Bourke was convicted.

After the conviction, the jury foreman told the press "... it was Azerbaijan, it was a foreign country. ... We thought he knew and definitely could have known [about the bribes]. He's an investor. It's his job to know."

On appeal to the Second Circuit, Bourke is now centrally claiming that he was convicted because the willful blindness instruction permitted the jury to convict him for inadequate due diligence in his investment, and in the absence of sufficient proof he decided not to learn about the bribes.

Just as in Bourke's case, the willful blindness instruction in Stadtmauer could have made all the difference. As a result, defense counsel in tax and non-tax criminal cases should seek, when possible, to exclude (and possibly seek to rebut) testimony and documents at trial that might support government arguments to the court that a willful blindness instruction to the jury is warranted by the trial evidence.

Counsel should be mindful that essential to the concept of conscious avoidance is that the defendant "be shown to have decided not to learn the key fact, not merely to have failed to learn it through negligence." United States v. Rodriguez, 983 F.2d 455, 458 (2d Cir. N.Y. 1993). The conscious avoidance instruction should only be given when there is sufficient evidence that "the defendant actually knew ... but refrained from obtaining the final confirmation. ... This, and this alone, is willful blindness." United States v. Reyes, 302 F.3d 48, 54 (2d Cir. N.Y. 2002). Defense counsel should always object to any willful blindness instruction, as well as carefully review the wording of any proposed government instruction. For example, a willful blindness instruction should not be allowed to possibly confuse the jury as to whether deliberate avoidance of knowledge could also apply to the jury's determination of a defendant's willfulness or specific intent. When appropriate, a counter-instruction should be offered by the defense.

Whether involving matters of willful blindness or a myriad of other issues, Pepper Hamilton's Tax Practice Group and White Collar Practice Group attorneys have the expertise, skills and trial experience needed to address your tax law compliance concerns.

Jeremy D. Frey and Paul D. Pellegrini

The material in this publication is based on laws, court decisions, administrative rulings, and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transactior or matter addressed herein.

This article is republished with permission of Pepper Hamilton, LLP. Further duplication without the permission of Pepper Hamilton, LLP is prohibited. All rights reserved.

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Comments

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