US v. Keith Simmon

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 3:10-cr-00023-RJC-DCK-1. [999256954]. [12-4469]

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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 12-4469

UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
KEITH FRANKLIN SIMMONS,
Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte.
Robert J. Conrad,
Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1)

Argued:

October 29, 2013

Decided:

December 11, 2013

Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.

Affirmed in part, reversed in part, vacated in part, and
remanded by published opinion. Judge Motz wrote the opinion, in
which Judge Gibney joined.
Judge Niemeyer wrote a dissenting
opinion.

ARGUED: Joshua B. Carpenter, FEDERAL DEFENDERS OF WESTERN NORTH
CAROLINA, INC., Asheville, North Carolina, for Appellant.
William Michael Miller, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee.
ON BRIEF: Henderson
Hill, Executive Director, Ann L. Hester, FEDERAL DEFENDERS OF
WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for
Appellant.
Anne M. Tompkins, United States Attorney, Amy

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Elizabeth Ray, Assistant United States Attorney, OFFICE OF THE
UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee.

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DIANA GRIBBON MOTZ, Circuit Judge:
Keith

Simmons

appeals

his

convictions

on

one

count

of

securities fraud, one count of wire fraud, and two counts of
money

laundering,

imprisonment.

as

well

as

his

sentence

of

fifty

years’

We affirm his fraud convictions but reverse his

money-laundering convictions because the transactions prosecuted
as

money

laundering

constituted

underlying fraudulent scheme.

essential

expenses

of

his

Accordingly, we affirm in part,

reverse in part, vacate his sentence, and remand for further
proceedings consistent with this opinion.

I.
A.
From April 2007 to December 2009, Simmons operated a $35
million

Ponzi

scheme

called

Black

Diamond

Capital

Solutions.

With help from a network of self-styled hedge fund managers,
Simmons recruited more than 400 investors by promising to invest
their

money

in

a

lucrative

exchange, or “Forex” fund.

and

exclusive

foreign

currency

Simmons told investors that only ten

or twenty percent of their investment would be at risk at any
given time.

He sent them monthly earnings statements reporting

sizeable profits.

And he promised them that, after an initial

ninety-day period, they could withdraw their money at will.

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Numerous investors tested Simmons’s promise and withdrew a
portion of their money after ninety days had passed.
receipt

of

these

returns,

which

seemed

to

Upon the

evidence

Black

Diamond’s legitimacy and profitability, many investors sent even
more money to Simmons.

Some recruited their friends to invest

with Simmons as well.
In fact, no Forex fund existed and Simmons never invested a
cent of his victims’ funds.

Simmons fabricated the earnings

reports, and he paid the purported returns to early investors
from deposits made by later ones. 1

Rather than investing his

victims’ funds as promised, Simmons treated their investments as
his personal piggy bank.

He purchased $4.6 million in real

estate, invested $1.2 million in an extreme fighting venture,
funneled $2.2 million to his other businesses, and bought lavish
gifts and trips for his employees and girlfriends.
Greed provoked the Ponzi scheme, and greed doomed it.

As

more investors sought to withdraw their funds, Simmons told a
series of escalating lies to “string out” investors and delay
withdrawals.

First,

he

claimed

that

withdrawals

were

interfering with the fund, and that he would henceforth limit
withdrawals in order to reduce the fund’s volatility.
1

Later, he

Simmons paid out a total of $19 million, but only $9
million made its way to actual investors.
Corrupt hedge fund
managers, who served as middle-men between Simmons and some of
his investors, siphoned off the rest.
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asserted

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that

he

was

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negotiating

with

a

German

named

Klaus

Bruner, who allegedly planned to cash out investors and take
over the account.

And Simmons told some investors that the FBI

itself was impeding some withdrawals.
Simmons
statements
Black

was

lying.

reflected

Diamond

bank

a

In
total

account

2009,
of

had

when

more
in

investors’

than

fact

$292

earning

million,

dwindled

to

the

$523.60.

Still, Simmons told investors that their money was safe.
By July 2009, Simmons permitted no further withdrawals by
investors.
new

After that date, Simmons managed to attract only one

investor.

Moreover,

their money back.
Simmons’s
December

investors

began

demanding

And as victim-investors became more alarmed,

dissembling
2009,

existing

the

became

FBI

more

raided

his

desperate.
offices.

Finally,
During

a

in
long

conversation with an FBI agent, Simmons confessed to the fraud.
Ultimately, Simmons’s Ponzi scheme cost his victims more
than $35 million.
their families.

Many lost their life savings.

Some lost

Many became depressed, even suicidal, after

learning that their money was gone.
B.
The Government indicted Simmons on one count of securities
fraud,

one

count

laundering.
Ponzi

scheme

of

wire

fraud,

and

two

counts

of

money

The fraud counts arose from Simmons’s role in the
itself,

which,

according
5

to

the

superseding

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indictment, took place from April 2007 to December 2009.
indictment

did

not

predicate

Simmons’s

two

fraud

The

charges

on

discrete instances of fraud; rather, it charged Simmons with a
two-and-one-half year “scheme to defraud,” specifically claiming
that

Simmons

executed

“what

is

commonly

known

as

a

ponzi

scheme.”

Simmons’s money-laundering counts, by contrast, arose

from

discrete

two

Government

payments

alleged

that

to

investors

these

made

payments

in

The

involved

also

2008.

the

“diver[sion of] investor money back to other investors in ponzifashion .

. .

to induce further investments by investors and

their friends and family members.”
Simmons proceeded to trial in December 2010.
victims

testified

managers,

an

confessed.
was

a

IRS

against
agent,

him,

and

as

the

FBI

Simmons did not testify.

neophyte

investors.

financier

who

did

Nine of his

certain

agent

to

hedge
whom

fund

Simmons

His counsel argued that he

never

intended

to

defraud

his

The jury, however, convicted him on all counts.

After Simmons’s conviction, a probation officer drafted a
presentence

report

imprisonment.

calculating

The

probation

Simmons’s
officer

recommended

recommended

an

term

of

offense

level of 43 -- the maximum level permitted under the Guidelines
-- and a criminal history category of I.

This offense level and

criminal

Guidelines-recommended

history

category

produced

sentence of 960 months’ imprisonment.
6

a

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The

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district

court

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varied

downward

from

the

probation

officer’s recommendation and sentenced Simmons to 600 months’
imprisonment.

Specifically, the court sentenced Simmons to 240

months on the securities-fraud count, a consecutive term of 240
months on the wire-fraud count, and 240-month terms on each of
the two money-laundering counts -- 120 months of which was to be
served

consecutively

to

the

fraud

counts,

and

360

months

of

which was to be served concurrently.

The court acknowledged

that

but

this

was

an

“enormous”

sentence,

explained

that

it

could not “remember another case that involved such devastating,
life wrecking” greed.
sentence

was

The court concluded that a fifty-year

sufficient,

but

not

greater

than

necessary,

to

accomplish justice.

II.
On

appeal,

Simmons

laundering convictions. 2

primarily

challenges

his

money-

He claims that the trial court erred by

2

Simmons also challenges all of his convictions on the
general ground that the district court violated due process by
admitting three pieces of assertedly irrelevant victim-impact
testimony. Even if the court erred in admitting this evidence,
any error was harmless.
Overwhelming evidence supported the
jury verdict. Nine testifying victims traced the fraud directly
to Simmons. He confessed his role in the Ponzi scheme to an FBI
agent, who also testified.
And the fraud left a paper trail
that pointed straight to Simmons.
Thus, given the wealth of
evidence against Simmons, even if the admission of brief victimimpact testimony was error, the guilty verdict “was surely
(Continued)
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declining to grant his motion for judgment of acquittal on those
counts.

We

review

acquittal de novo.

the

denial

of

a

motion

for

judgment

of

United States v. Mehta, 594 F.3d 277, 279

(4th Cir. 2010).
A.
The federal promotional money-laundering statute makes it a
crime

to

engage

proceeds

of

“promote

the

in

a

specified
carrying

§ 1956(a)(1)(A)(i)

“financial
unlawful
on”

(2006).

transaction”

activity”

of

that

The

involving

with

the

activity.

statute

“the

intent
18

defines

to

U.S.C.

“specified

unlawful activity” to encompass more than 250 predicate crimes,
including

securities

fraud

and

wire

fraud.

Id.

at

§ 1956(c)(7)(A).
Both of Simmons’s money-laundering convictions arose from
payments that he made to investors during the course of his
Ponzi scheme.

The first conviction was based on a wire transfer

of $150,000 to James Bazluki on March 14, 2008.
invested

$250,000

in

Black

Diamond

prior

to

Bazluki had

receiving

this

return; after receiving it, Bazluki invested another $70,000.
The

second

money-laundering

conviction

was

based

on

transfer of $16,000 to Till Lux on October 22, 2008.

unattributable to the error.”
275, 279 (1993).

a

wire

Lux had

Sullivan v. Louisiana, 508 U.S.

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invested

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$40,000

in

Black

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Diamond.

He

testified

that

after

recovering the $16,000, he subsequently convinced many of his
friends

to

invest

in

Black

Diamond.

Lux

also

continued

to

withdraw money from Black Diamond, and ultimately turned a small
profit on his investment.

Simmons contends that these payments

did not involve “proceeds” of unlawful activity as required to
constitute money laundering.
His argument relies on United States v. Santos, a 4-1-4
decision

in

which

the

Supreme

Court

reversed

the

money-

laundering convictions of a defendant convicted of both running
an illegal gambling business and money laundering.
(2008).

553 U.S. 507

Santos’s gambling counts arose from his operation of an

illegal lottery through a network of local bars and restaurants.
The money-laundering counts were based on payments by Santos to
the “runners” and “collectors” who helped operate the lottery,
and

to

the

concluded
operating

lottery

that
an

these

illegal

winners

themselves.

payments
lottery,

The

involved
and

could

the

lower

court

“proceeds”

therefore

of

constitute

grounds for money-laundering convictions.
Five
Justice

members

plurality

of

the

Supreme

concluded

that

Court
the

disagreed.

term

A

“proceeds”

fourin

the

money-laundering statute was ambiguous -- it could mean either
“receipts” or “profits” -- and invoked the rule of lenity to
resolve the ambiguity in favor of the defendant.
9

Id. at 514

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(plurality

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opinion).

money-laundering

The

statute

plurality
only

rejecting

the

thus

covers

“profits” of criminal activity.
In

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concluded

transactions

that

the

involving

Id. at 524.

statute’s

broader

interpretation,

the

plurality found that construing “proceeds” to mean “receipts”
would create a “merger problem.”

Id. at 515.

The plurality

explained that those who run illegal gambling businesses must
necessarily pay their accomplices and the lottery’s winners.

If

a defendant could commit money laundering merely by “paying the
expenses

of

his

illegal

activity,”

all

illegal

gambling

businesses would involve money laundering, and the Government
could

punish

a

defendant

twice

intended to punish only once.

for

an

offense

that

Congress

Id. at 517.

This merger problem, the plurality noted, is not limited to
illegal gambling.

Writing for the plurality, Justice Scalia

explained:
Few crimes are entirely free of cost, and costs are
not always paid in advance.
Anyone who pays for the
costs of a crime with its proceeds -- for example, the
felon who uses the stolen money to pay for the rented
getaway car -- would violate the money-laundering
statute. And any wealth-acquiring crime with multiple
participants would become money laundering when the
initial recipient of the wealth gives his confederates
their shares.
Generally speaking, any specified
unlawful activity, an episode of which includes
transactions which are not elements of the offense and
in which a participant passes receipts on to someone
else, would merge with money laundering.

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Id.

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at

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516.

The

plurality

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concluded

that

interpreting

“proceeds” to mean “profits” would resolve the merger problem by
ensuring that defendants cannot be convicted of money laundering
merely for paying the essential “crime-related expenses” of the
predicate crime.

Id. at 515.

Justice Scalia devoted much of the plurality opinion to
challenging the dissent’s prediction that applying the “profits”
interpretation would undermine the viability of “the very cases
that

money

cases

laundering

involving

statutes

large-scale

principally

criminal

over a substantial period of time.”
(Alito, J., dissenting).
plurality’s

approach,

target,

operations

that

that

is,

continue

Santos, 553 U.S. at 538-39

The dissent warned that, following the

the

money-laundering

statute

could

not

reach long-term criminal enterprises in which the distinction
between payments of “essential expenses” and payments dispensing
criminal

profits

may

often

be

unclear.

But

dismissed the dissent’s concerns as baseless.
plurality,

determining

the

lifespan

of

a

the

plurality

According to the
long-term

criminal

enterprise, for purposes of evaluating whether the enterprise
produced

profits,

would

raise

no

difficulties

because

an

enterprise lasts “as long as the Government chooses to charge.”
Id. at

520

n.7

(plurality

opinion).

Because

the

Government

selects the lifespan of the predicate crime, it must prove that
payments

charged

as

money

laundering
11

during

that

lifespan

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involved

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profits,

predicate crime.

rather

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than

essential

expenses,

of

the

Id.

Justice Stevens provided the crucial fifth vote to reverse
Santos’s money-laundering convictions, but did not endorse the
plurality’s

view

that

“proceeds”

always

means

“profits.”

Rather, Justice Stevens concluded that courts should resolve the
scope

of

the

term

“proceeds”

on

a

reference to congressional intent.
concurring).

case-by-case

basis

by

Id. at 525 (Stevens, J.,

Justice Stevens grounded his conclusion on the

merger problem identified by the plurality.

He concluded that

using funds earned through an illegal lottery business to pay
the

“essential

expenses”

money laundering.
that

there

was

of

Id. at 528.
“no

that

business

cannot

constitute

And he agreed with the plurality

explanation

for

why

Congress

would

have

wanted a transaction that is a normal part of a crime it had
duly

considered

Criminal

Code,

crime.”

Id.

and
to

appropriately

radically

punished

increase

the

elsewhere
sentence

in

for

the
that

Justice Stevens concluded that Congress could not

have intended such a perverse result.

Id.

B.
Congress amended the money-laundering statute in May 2009;
that amendment effectively overruled Santos, defining proceeds
to include “gross receipts.”

Fraud Enforcement and Recovery Act

of 2009, Pub. L. No. 111–21, § 2(f)(1), 123 Stat. 1617, 1618
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(2009) (codified at 18 U.S.C. § 1956(c)(9)).

However, because

the amendment was not enacted at the time of the conduct giving
rise

to

Simmons’s

money-laundering

convictions,

this

expanded

definition of “proceeds” does not apply in this case.

We are

therefore called on to wade into the murky Santos waters, as we
have in three previous published opinions.
In United States v. Halstead, we considered the reach of
Santos in the context of a defendant convicted of healthcare
fraud

and

money

laundering.

634

F.3d

270

(4th

Cir.

2011).

Halstead’s fraud convictions arose from his scheme to capitalize
on his patients’ healthcare benefits by making phony medical
diagnoses.

His money-laundering conviction, by contrast, arose

from his transfer of the illicit gains into his personal bank
account.

He claimed that Santos prohibited his money-laundering

conviction because transferring his ill-gotten gains into his
own coffers constituted an “essential expense[] of operating”
his healthcare fraud.

Santos, 553 U.S. at 528 (Stevens, J.,

concurring).
To

resolve

exactly, Santos
disposition.

Halstead’s

argument

held

task

--

a

we

first

complicated

by

examined
the

what,

fractured

Relying on Marks v. United States, 430 U.S. 188

(1977), we interpreted Santos narrowly to bind lower courts only
in cases where illegal gambling constituted the predicate for
the defendant’s money-laundering conviction.
13

Halstead, 634 F.3d

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at 279.
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But, because the merger problem provided the “driving
behind

both

the

plurality’s

and

Justice

Stevens’s

opinions, we recognized that Santos compelled us to construe the
money-laundering statute so as to avoid punishing a defendant
twice for the same offense.

Id. at 278-79.

We concluded that a

defendant cannot be convicted of money laundering merely “for
paying

the

crime.”

essential

expenses

of

operating

the

Id. at 278 (quotation marks omitted).

underlying
But if “the

financial transactions of the predicate offense are different
from the transactions prosecuted as money laundering” no merger
problem arises.
Applying

Id. at 279-80.

this

rule

to

Halstead,

we

held

problem tainted his money-laundering conviction.
fraud

was

healthcare
into

his

“complete”

as

soon

reimbursements.
own

account

as

he

received

Transferring

thereafter

these

constituted

that

no

merger

His healthcare
the

ill-gotten

reimbursements
an

altogether

“separate” offense that the Government properly prosecuted as
money laundering.

Id. at 280.

After Halstead, we twice returned to Santos and its elusive
merger problem.

In United States v. Cloud, we considered a

defendant convicted of mortgage fraud -- for fraudulently luring
home-buyers into making bad real-estate investments -- and money
laundering -- for paying kickbacks to the accomplices who helped
him locate his victims.

680 F.3d 396 (4th Cir. 2012).
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reversed Cloud’s money-laundering convictions, concluding that
the kickbacks constituted “essential expenses” of the mortgagefraud scheme because “Cloud’s mortgage fraud depended on the
help of others, and their help, in turn, depended upon payments
from Cloud.”

Id. at 406.

Because Cloud’s scheme “could not

have succeeded” without the kickbacks, we held that convicting
him separately for these transactions would present the very
same merger problem identified in Santos.

Id. at 407.

A few months ago, in United States v. Abdulwahab, we again
relied

on

Santos

convictions.

to

reverse

a

defendant’s

money-laundering

715 F.3d 521 (4th Cir. 2013).

Abdulwahab had

committed an elaborate investment fraud, and the jury convicted
him of money laundering based on payments he made to his coconspirators to carry out that fraud.
Cloud,

we

found

that

these

payments

Id. at 506-07.
“were

for

As in

services

that

played a critical role in the underlying fraud scheme” because
they persuaded confederates to participate in the crime.
531.

Id. at

Abdulwahab resembled the paradigmatic felon, recognized by

the Santos plurality, who uses “stolen money to pay for the
rented getaway car.”

Id.

We therefore concluded that the same

merger problem presented in Santos barred his money-laundering
convictions.

Id.

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III.
Simmons argues that Santos, Halstead, Cloud, and Abdulwahab
require that we reverse his money-laundering convictions.

He

claims that his payments to investors did not involve “proceeds”
of

criminal

activity

but

rather

maintaining his Ponzi scheme.
him

separately

of

money

“essential

expenses”

of

And he maintains that convicting

laundering

for

payments

that

were

essential to accomplishing his fraud would raise the same fatal
merger

problem

identified

in

Santos.

The

Government,

by

contrast, argues that Simmons’s fraud did not depend on payments
to investors and that these payments were not essential to the
fraud.

The Government therefore maintains that Simmons’s money-

laundering convictions should be affirmed.
A.
After considering the record in this case, the parties’
arguments,

and

controlling

money-laundering
admitted

at

law,

convictions

Simmons’s

ongoing

success

of

earlier

investors,

his

trial

we

conclude

cannot

stand.

irrefutably

Ponzi

including

scheme
those

that

Simmons’s

The

evidence

established

depended
payments

on

that

payments

charged

in

the
to
the

money-laundering counts.
The

evidence

against

Simmons

confirmed

the

commonsense

notion that people generally do not send money into unproven
investment

schemes

without

some
16

evidence

that

they

will

see

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their money again.

Pg: 17 of 30

Early payments from Simmons provided his

victims with just such evidence.
that

Simmons

paid

to

early

Thus, the $9 million dollars
investors

was

essential

to

perpetuating the fraud scheme that ultimately earned him more
than $35 million.

Indeed, James Bazluki -- the victim whose

payment

basis

formed

the

of

Simmons’s

first

money-laundering

count -- testified that the fact that he “was able to request
money out of the account” convinced him “that this was a good
place to have [his] money” and prompted him to make further
investments.
Simmons’s

And Till Lux -- whose payment formed the basis of

other

money-laundering

count

--

testified

that

the

fact that he was able to withdraw from his account made him “100
percent confident” in his investment, convinced him that his
gains

were

“not

just

friends to invest.

on

paper,”

and

made

him

encourage

his

In sum, the very victims who received the

payments that formed the basis for Simmons’s money-laundering
charges unequivocally testified to the critical importance of
those payments in fostering the (misplaced) confidence necessary
to perpetuate the fraud.
That Simmons’s fraud continued for five months after the
payments to existing investors stopped does not alter this fact.
When payments ceased in July 2009, Simmons managed to attract
only one new investor.

And, as soon as the payments ceased,

existing investors started demanding the answers that led to the
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scheme’s prompt unraveling.

Pg: 18 of 30

That Simmons managed, through lies

and dissembling, to extend a fraud that had endured for more
than two years for an additional five months without paying any
new returns to investors does not prove that those payments were
unnecessary to the scheme.
the Ponzi

scheme

when

If anything, the rapid unraveling of

the

payments

ceased

suggests

just

the

opposite.
Furthermore,
this

case,

investors

as

indictment
transfers

the

we

note

Government

essential

to

characterized
to

that

“wire

ponzi

throughout

itself

treated

Simmons’s

the

wire

payment

its

the

fraud.

fraud
to

prosecution
payments

The

offense

investors

of
to

superseding
as

and

including
to

their

intermediaries in other States” -- the very transactions that
the Government later prosecuted as money laundering.
closing

argument,

the

Government

contended

that

And in its
payments

to

investors were necessary to the fraud because they “g[a]ve the
investors

confidence”

that

their

investment

was

sound

and

“induce[d] them to put even more money back into the scheme.”
The Government explained that the payments were “one of the ways
the defendant kept the scheme going.”
In addition to the evidence proving that this particular
Ponzi

scheme

payments

are

Ponzi schemes.

relied

on

understood

payments
to

to

constitute

early

investors,

essential

such

features

of

In fact, we have defined a Ponzi scheme as one
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“in which early investors are paid off with money received from
later investors in order to prevent discovery and to encourage
additional and larger investments.”
107

F.3d

257,

259

n.1

(4th

Cir.

United States v. Loayza,
1997).

The

Oxford

English

Dictionary similarly defines a Ponzi scheme as a “form of fraud
in which belief in the success of a non-existent enterprise is
fostered by payment of quick returns to first investors using
money

invested

by

others.”

Ponzi

Scheme,

Oxford

English

Dictionary (2013).
Given these definitions, it is hardly surprising that the
only other appellate court to decide a case involving a Ponzischeme operator convicted of both fraud and money laundering has
reached the same conclusion as we do.

In United States v. Van

Alstyne,

the

the

laundering
purported

Ninth

Circuit

convictions
returns

to

on

reversed
the

early

ground

investors

defendant’s

that
were

convictions

payments

“inherent”

defendant’s underlying scheme to defraud.
(9th Cir. 2009).

the

money-

to

of
the

584 F.3d 803, 815

The court concluded that the money-laundering

suffered

from

a

merger

problem

because

the

very

nature of a Ponzi scheme “require[s] some payments to investors
for it to be at all successful.”
Finally,

we

note

that

Id. at 815.

when

Congress

amended

the

money-

laundering statute in 2009 to include “gross receipts” within
the

law’s

definition

of

“proceeds,”
19

the

Senate

Report

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acknowledged that Ponzi scheme payments could not be prosecuted
as

money

laundering

under

the

existing

statute.

The

Report

bluntly stated that, given the Santos Court’s interpretation of
the existing statute, the “proceeds of ‘Ponzi schemes’ like the
Bernard Madoff case, which by their very nature do not include
any profit, would be out of the reach of the money laundering
statutes.”

S. Rep. No. 111-10, at 4 (2009).

Of course, the

Senate’s interpretation of Supreme Court case law does not bind
us.
of

It does, however, accord with our conclusion that payments
purported

constitute

returns

to

“essential

early

expenses”

investors
of

Ponzi

are

understood

schemes

rather

to
than

transactions dispensing a Ponzi scheme’s profits.
B.
The

Government

concedes

that

this

case

involves

a

“difficult line-drawing” issue, Gov’t Br. at 57, but nonetheless
contends
principal

that

we

must

arguments

affirm.

as

to

The

why

Government

Simmons’s

raises

three

money-laundering

convictions present no merger problem.
First, the Government contends that Simmons’s returns to
investors

constitute

“the

reinvestment

of

profit

to

finance

future fraud” rather than “essential expenses” of an ongoing
fraud.

Gov’t

Br.

criminal

profits

to

at

56.

finance

Although
a

future

the

line

fraud

between

and

using

using
gross

receipts to pay the expenses of an ongoing fraud is less than
20

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self-evident,

see

Santos,

dissenting),

Santos

both

Pg: 21 of 30

553

U.S.

requires

us

at
to

544
draw

(Alito,
this

line

J.,
and

offers useful guidance as to where the line falls in this case.
Santos’s

gambling

scheme

and

Simmons’s

Ponzi

scheme

resemble each other in virtually all material respects.
constituted

ongoing

transactions.

schemes

rather

than

discrete

Both

criminal

The indictments in both cases charged underlying

conduct that spanned a number of years rather than a single
illegal act.

And both schemes required occasional payments to

third parties to sustain the crime during its lifespan.
Santos

paid

his

lottery

winners,

presumably

hoping

that

reliable paydays would induce winners, losers, and new players
alike to test their luck during the next round of play.
course,

Santos

could

instead

pocketed

the

have

declined

cash.

Had

to

he

pay

done

his
so,

Of

winners

and

however,

his

gambling scheme would have been short-lived; it could not have
lasted the six years charged in the indictment.

A majority of

the Supreme Court therefore agreed that Santos’s payments to
winners did not amount to the reinvestment of profit to finance
new,

discrete

gambling

crimes.

Rather,

these

payments

constituted expenses necessary to further a crime that, by its
very nature, required periodic payments to survive.
The same is true in this case.
winners

in

the

hopes

of

attracting
21

Like a bookie who pays his
new

and

repeat

gamblers

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during

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the

Filed: 12/11/2013

course

of

an

Pg: 22 of 30

ongoing

lottery,

Simmons

paid

early

investors in the hopes of attracting new and repeat investors
during the course of an ongoing fraud.

Although Simmons could

have absconded with the early investors’ money before paying any
returns, had he done so, his scheme certainly could not have
lasted

for

indictment.

the

nearly

three-year

period

charged

in

the

See Santos, 553 U.S. at 520 n.7 (plurality opinion)

(a criminal enterprise’s profitability must be proved for “as
long as the Government chooses to charge”).
Given this case’s similarity to Santos, we must decline the
Government’s invitation to divide Simmons’s Ponzi scheme into a
successive series of past, present, and future frauds.

Rather,

Santos requires that we hold that Simmons’s Ponzi scheme, like
the

lottery

enterprise

scheme
that

the

in

Santos,

defendant

represented
could

a

sustain

single,
only

by

ongoing
making

limited payouts.
The Government next argues that payments to innocent third
parties -- rather than to coconspirators -- cannot constitute
essential expenses of a criminal scheme.

The Government notes

that in both Cloud and Abdulwahab, the payments we deemed to be
essential

were

made

to

the

defendant’s

criminal

accomplices

rather than to innocent outsiders like Simmons’s Ponzi victims.
According to the Government, while paying one’s accomplices is a
typical expense of criminal activity akin to paying for a rented
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getaway

car,

Filed: 12/11/2013

paying

investors

Pg: 23 of 30

in

order

to

maintain

a

Ponzi

scheme is a different matter entirely.
This argument ignores the very facts of Santos itself.
Santos,

payments

formed

the

553
were

believe

of
U.S.

collectors,

the
at

accomplices

winners were not. 3
not

runners,

basis

convictions.
collectors

to

and

defendant’s

509.
to

Although
Santos’s

lottery

In

winners

money-laundering
the

runners

crime,

the

and

lottery

Manifestly, the Supreme Court therefore did

that

the

merger

problem

arises

only

defendant pays his co-conspirators or accomplices.

when

the

See Santos,

553 U.S. at 515-16 (plurality opinion) (“Since few lotteries, if
any,

will

illegal

not

pay

lotteries

statute.”).

For

their
would

our

winners,
‘merge’

part,

we

the
with

have

statute
the

criminalizing

money-laundering

repeatedly

explained

in

interpreting Santos that the essential nature of the payment -rather than the identity of the payment’s recipient -- dictates
whether a given transaction raises a merger problem.

See Cloud,

680 F.3d at 407; Halstead, 634 F.3d at 279.
3

That these winners participated in an illegal lottery, and
were therefore not strictly “innocent,” did not make them
accomplices to Santos’s crime.
The illegal gambling statute
criminalizes
“conduct[ing],
financ[ing],
manag[ing],
supervis[ing], direct[ing], or own[ing]” a gambling operation
that violates state law. 18 U.S.C. § 1955 (2006). The statute
thus criminalizes the management of -- rather than the mere
participation in -- an illegal gambling venture.
Just like
Simmons’s victims, the lottery winners were therefore not
participants or co-conspirators in Santos’s crime.
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Finally,
payments

in

stretches

to

Filed: 12/11/2013

perhaps
this

Pg: 24 of 30

recognizing

case

and

distinguish

those

them

by

the
in

similarity
Santos,

pointing

between

the

the

Government

the

assertedly

to

unscheduled, discretionary nature of the Ponzi payments.

The

Government maintains that although regular payments to lottery
winners -- as in Santos -- can constitute essential expenses of
a criminal scheme, “payments in discretionary amounts made on no
schedule in particular” -- assertedly as in this case -- cannot.
Gov’t Br. at 57.
It is not at all clear that the payments in Santos were
more “scheduled” or less “discretionary” than those here. 4

But

even assuming that Santos made payments according to a strict
schedule, and that Simmons made them at whim, the Government
raises a distinction without a difference.

If a criminal scheme

requires certain payments to succeed, it makes no difference
whether

these

payment

need

Simmons’s

payments
not

Ponzi

be

arrive

regularly

predictable

scheme

depended

4

to
on

or

be

sporadically.

essential.

periodic

A

Because

payments

to

The payments here were governed by a contract permitting
investors to withdraw funds on the first business day of each
month. To be sure, Simmons failed to honor this contract. But
his ultimate failure to honor his contractual obligations does
not
necessarily
render
the
payments
that
he
did
make
unscheduled.
For its part, the Santos Court never specified
whether Santos paid his winners on a particular schedule.
In
any event, in neither case can the payments be characterized as
“discretionary” given that both schemes depended on the payments
to survive.
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investors, these payments constituted essential expenses of his
criminal

enterprise

regardless

of

whether

they

accrued

on

a

specified timetable.

IV.
Simmons’s fraudulent scheme, like any typical Ponzi scheme,
depended

on

attracting

new

investments

payouts to existing investors.

through

occasional

Without these payouts, there

would have been no new investments and, consequently, no Ponzi
scheme.

The Government conceded -- indeed, trumpeted -- this

fact throughout the trial proceedings -- both in its charging
documents and its arguments to the jury.

And Congress itself

recognized as much when it amended the money-laundering statute
in 2009 to ensure that Ponzi disbursements like the ones at
issue here could henceforth be punishable as money laundering.
Simmons’s

payments

to

investors,

like

Santos’s

payments

to

lottery winners, constitute essential expenses of his underlying
fraud.

Punishing

Simmons

separately

for

these

payments

therefore raises the same merger problem identified in Santos.
For

these

convictions,

reasons,
we

while

must

we

reverse

25

affirm
his

Simmons’s
two

two

fraud

money-laundering

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convictions,

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vacate

his

Pg: 26 of 30

sentence,

and

remand

for

further

proceedings consistent with this opinion. 5

AFFIRMED IN PART, REVERSED IN PART,
VACATED IN PART, AND REMANDED

5

We need not address Simmons’s contention that his fiftyyear sentence was procedurally and substantively unreasonable.
And, given that Simmons’s procedural challenge to his sentence
rests on an asserted misapplication of a money-laundering
sentence enhancement, this challenge should be moot on remand in
light of our reversal of the money-laundering convictions on
which it is based.
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NIEMEYER, Circuit Judge, dissenting:
During the course of this Ponzi scheme, Simmons obtained
money through wire fraud and securities fraud from investing
customers and used a portion of the money so obtained -- the
proceeds of the fraud -- to return $150,000 to James Bazluki and
$16,000 to Till Lux in an effort to conceal the fraud he had
committed on them.

By so investing the proceeds of the fraud,

Simmons was able to engage in additional fraud from which he
obtained additional proceeds, because the payments to Bazluki
and Lux deflected potential suspicion that otherwise might arise
with respect to his initial fraudulent transactions.
Under these facts, when Simmons returned money to Bazluki
and Lux, he engaged in “transactions” that constituted money
laundering,

in

violation

of

18

U.S.C.

§ 1956(a)(1)(A)(i)

(prohibiting financial transactions involving the “proceeds of
specific unlawful activity” (i.e., in this case, wire fraud and
securities

fraud)).

And

obtaining

investors’

money

completed

when

Simmons

the

fraud

was

a

received

committed

distinct,
the

by

Simmons

antecedent

money.

In

in

crime,
these

circumstances, I submit, the two crimes (money laundering and
wire or securities fraud) did not merge so that Simmons was
subjected to punishment twice for the same conduct.

See United

States v. Santos, 553 U.S. 507, 517 (2008) (observing that a
“merger problem” would allow prosecutors, in their discretion,
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to seek the higher penalty for the two merged crimes or both
penalties); United States v. Halstead, 634 F.3d 270, 278-79 (4th
Cir. 2011) (same).
Disagreeing with the majority’s analysis, I would conclude
that the payments to Bazluki and Lux were not the “essential
expenses” of Simmons’ wire fraud.

See Santos, 553 U.S. at 528.

The wire fraud did indeed have expenses in marketing and selling
the scheme and paying employees to work the office.

But once

the

and

fraudulent

statements

were

made

to

customers

the

customers sent money to Simmons based on the statements, the
fraud was complete, and Simmons would then be punishable for
violating

the

wire

fraud

statute,

18

U.S.C.

§

1343.

The

subsequent payments back to the investors, who had earlier been
defrauded, were not expenses of the fraudulent act -- they were
not necessary as a matter of fact or law.

Rather, they were

acts of money-laundering that indeed would have the effect of
covering up the fraud and thus promoting future frauds.
Our decision in United States v. Cloud, 680 F.3d 396 (4th
Cir. 2012), makes clear the distinction between an expense of
the fraud and a payment to conceal the fraud and promote future
frauds.
employed

In

Cloud,

recruiters,

the
as

proceeds

of

the

coconspirators

helped perpetuate the fraud.

of

Id. at 408.

fraud
the

were

paid

defendant,

to
who

We noted that the

payments to these recruited coconspirators were the “essential
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expenses of Cloud’s underlying fraud, thus presenting a merger
problem.”

Id. at 407.

We thus found it essential that the

payments be made to conspiring employees, distinguishing those
payments from payments made to investors for cover-up and future
frauds.

As we stated:

In utilizing monies from previous properties to
finance future purchases, Cloud was not paying the
“essential expenses” of the underlying crime.
Cloud, 680 F.3d at 408; see also United States v. Abdulwahab,
715

F.3d

521,

531

payments

made

played

critical

a

to

(4th

the

Cir.

2013)

defendant’s

role

in

the

(likewise

agents

underlying

for

holding

that

“services

that

fraud

scheme”

were

essential expenses of the fraud and recognizing the distinction
made

in

Cloud

that

payments

to

nonparticipating

persons

to

promote future frauds were not “essential expenses”).
In

this

case,

Bazluki

and

Lux

were

not

recruiters,

confederates, or coconspirators in the fraudulent scheme.

To

the contrary, they were innocent victims of Simmons’ wire or
securities fraud, and the payments made to them were to cover up
Simmons’ past fraud and promote future fraud.

Simmons’ ability

to obtain investments based on fraudulent statements subjected
him to punishment under 18 U.S.C. § 1343, as well as 15 U.S.C.
§ 78j(b), and his payments of the fraudulently obtained monies
to

victims

of

the

fraud

were

separate

“transactions”

that

subjected him to punishment for money laundering under 18 U.S.C.
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§ 1956(a)(1)(A)(i).

Pg: 30 of 30

In this circumstance, there is no risk of

penalizing Simmons twice for the same conduct.
The majority could only make its analysis work if Simmons
were convicted of some single crime prohibiting a Ponzi scheme
because

under

fraudulent

a

transactions

transactions.
prohibiting
distinct

a

scheme,
are

Simmons

was

Ponzi

scheme;

he

and

of
his

wire

fraud,

payment

the

used

But

crimes

laundering,

Ponzi

of

proceeds
to

not
was

earlier

in

future

engage

charged
charged

securities
monies

from

to

with
with

fraud,

a

crime

committing
and

investors

money

who

had

already been defrauded was not an expense of the fraud; it was a
transaction of money laundering.
Accordingly, I would not find that a merger problem exists
in this case and would affirm on all counts.

30