US v. Jonathan Davey

Filing

UNPUBLISHED AUTHORED OPINION filed. Originating case number: 3:12-cr-00068-RJC-DSC-1. Copies to all parties and the district court/agency. [999925214]. [15-4097]

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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-4097

UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
JONATHAN D. DAVEY,
Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte.
Robert J. Conrad,
Jr., District Judge. (3:12-cr-00068-RJC-DSC-1)

Argued:

May 12, 2016

Decided:

September 8, 2016

Before TRAXLER and WYNN, Circuit Judges, and Norman K. MOON,
Senior United States District Judge for the Western District of
Virginia, sitting by designation.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Traxler and Senior Judge Moon joined.

ARGUED: Gary Alvin Bryant, WILLCOX & SAVAGE, PC, Norfolk,
Virginia, for Appellant. Anthony Joseph Enright, OFFICE OF THE
UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee.
ON BRIEF: Dianne K. Jones McVay, JONES MCVAY LAW FIRM, PLLC,
Dallas, Texas, for Appellant.
Jill Westmoreland Rose, United
States
Attorney,
OFFICE
OF
THE
UNITED
STATES
ATTORNEY,
Charlotte, North Carolina, for Appellee.

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Unpublished opinions are not binding precedent in this circuit.

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WYNN, Circuit Judge:
Jonathan Davey (“Defendant”) appeals his jury convictions
for conspiracy to commit wire fraud, conspiracy to commit money
laundering,

and

tax

evasion,

as

well

as

a

related

award

of

restitution.

Defendant contends that the district court erred

in

certain

excluding

evidence,

that

there

was

insufficient

evidence supporting his conviction for tax evasion, and that
restitution

was

improperly

calculated.

We

reject

these

arguments, and affirm.
I.
A.
Evidence

produced

at

trial

revealed

the

following.

In

2007, Defendant created a hedge fund named “Divine Circulation
Services” (“DCS”).

Over the following two years, he solicited

millions of dollars in funds from numerous entities and private
individuals, and through DCS, he invested that money in four
different

business

ventures,

each

of

which

either

failed

or

turned out to be fraudulent.
By February 2009, one of the only DCS investments that was
purportedly

still

profitable

was

with

a

supposed

hedge

fund

called “Black Diamond,” which was later revealed to be a Ponzi
scheme.

That month, Black Diamond’s founder, Keith Simmons, met

with Defendant and other hedge fund managers with investments in
Black Diamond and told them that a “cash out” was imminent. J.A.
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146-48.

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In other words, said Simmons, Black Diamond soon would

be shut down, and all investor money would be returned.
payout

never

happened.

Indeed,

soon

after

the

That

meeting

announcing the supposed cash out, Black Diamond stopped honoring
withdrawal requests from its investors.
By the end of April 2009, Black Diamond was effectively
illiquid, the other DCS business ventures had collapsed, and
Defendant

had

stopped

ventures,

including

investing

Black

Diamond.

additional

money

Nevertheless,

in

any

Defendant

continued to solicit funds from new investors on the pretense
that their money actually would be invested.

Along with other

hedge fund managers who had invested in Black Diamond, Defendant
set up a “cash” or “liquid” account in which to deposit these
new investor funds. J.A. 149.
Defendant

used

it

to

Instead of investing the money,

fulfill

withdrawal

requests

from

old

investors, to pay himself a management fee, and to pay his own
personal expenses.

In other words, Defendant set up his own

Ponzi scheme.
In addition to misrepresenting that DCS investors’ money
actually would be invested, Defendant made a number of other
false statements in order to obtain, or retain, investor funds.
For instance, Defendant told one large investor about a supposed
liquidity provider that did not exist, and he falsely suggested

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to another investor that his organization had developed and was
using a successful currency trading software.
After

the

February

2009

meeting

during

which

Simmons

announced the Black Diamond “cash out,” Defendant also helped
facilitate a broader Ponzi scheme involving numerous other hedge
fund managers who, like Defendant, used new investor money to
fund withdrawal requests and pay personal expenses.

In return

for a monthly management fee, Defendant—through an entity called
“Safe

Harbor”—served

as

a

hedge

fund

administrator,

handling

fund transfers to and from hedge fund cash accounts.

In doing

so,

reassure

Defendant

contributed

to

an

effort

to

falsely

investors that their investments were sound by maintaining a
website

accessible

monthly returns.

to

investors

that

showed

false,

positive

DCS investors were among those with access to

this website, and the investors made additional investments in
reliance on the false information it conveyed.

Defendant also

permitted the hedge fund managers to report that they had been
vetted by an “independent” accounting firm, i.e., Safe Harbor,
when that was not the case. J.A. 175-76.
One

of

the

most

significant

personal

expenses

Defendant

funded with DCS investor money was the construction of a $2
million,

10,000-square-foot

personal

home.

To

channel

money

from DCS towards the construction of his home, Defendant created
two additional entities: “Sovereign Grace” and “Shiloh Estates.”
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Essentially,

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Defendant

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transferred

funds,

in

the

form

of

purported “loans,” from DCS to Sovereign Grace, and then from
Sovereign Grace to Shiloh Estates, the legal owner of the home
and direct funder of its construction. J.A. 291-98, 513.
Those “loans” had no recognized interest rates, no payment
schedules, no associated liens, and no loan documentation.

In

late 2008, Defendant informed Barry McFerren, his brother-in-law
and

business

loans,

and

$810,000

as

associate,

Defendant
a

“loan”

that

did
on

so

he

intended

in

2009.

his

2008

to

default

Defendant
tax

return,

on

the

identified
an

amount

corresponding to purported loan payments to Shiloh Estates in
that year. J.A. 516-17.
Over time, without any truly profitable investments, the
money in DCS dried up.
had

accumulated

over

Near the end of August 2009, when DCS
$4

million

in

outstanding

withdrawal

requests from investors, Defendant stopped accepting additional
investments.

Through the fall of 2009, however, he continued to

use DCS money to pay personal expenses, and he continued to
accept fees from other hedge fund managers for publishing false
returns

on

Safe

Harbor’s

website.

Outstanding

withdrawal

requests from DCS investors grew to over $6 million by the end
of November 2009.

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B.
In

February

2012,

the

government

indicted

Defendant

and

three of the other hedge fund managers involved in the above
scheme on charges of conspiracy to commit securities fraud, 18
U.S.C. § 371, conspiracy to commit wire fraud, 18 U.S.C. § 1349,
and conspiracy to commit money laundering, 18 U.S.C. § 1956(h).
Additionally, Defendant was indicted for tax evasion, 26 U.S.C.
§ 7201.

The

other

co-defendants

pled

guilty,

but

Defendant

elected to go to trial.
Over

the

course

of

a

four-day

trial,

the

government

presented testimony from over a dozen witnesses, including one
of the hedge fund managers who participated in the broader Ponzi
scheme,

Defendant’s

investigator,
DCS.

The

and

two

principal

numerous

individuals

defense

presented

employees,
who

testimony

an

invested

from

five

IRS

money

in

witnesses,

including Defendant and Simmons.
The jury returned a verdict of guilty on all four counts.
The

district

imprisonment.
conspirators
million

in

restitution

court
The
jointly

sentenced
court
and

restitution.
amount

and

also

Defendant
found

to

Defendant

severally

liable

Defendant

appealed,

all

of

conviction for securities fraud.

7

his

252

for

and

months’
his

roughly

$21.8

challenging

convictions

except

co-

the
his

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II.
Defendant

first

argues

that

the

trial

court

committed

reversible error with regard to multiple evidentiary rulings.
In particular, Defendant contends that the district court should
not

have

excluded:

Defendant

turned

(1)

away

testimony

in

the

from

fall

of

certain
2009,

investors

(2)

evidence

regarding certain non-fraudulent investments made by DCS, and
(3) evidence that Defendant eventually paid taxes on the amount
he designated as a “loan” on his 2008 tax return.
We review a district court’s evidentiary rulings for abuse
of discretion. United States v. Reevey, 364 F.3d 151, 156 (4th
Cir. 2004).

Moreover, such rulings are subject to a harmless-

error standard, meaning that we will affirm notwithstanding an
error if it is “‘highly probable that the error did not affect
the judgment.’”

United States v. Ibisevic, 675 F.3d 342, 349–50

(4th Cir. 2012) (quoting United States v. Madden, 38 F.3d 747,
753 (4th Cir. 1994)).
A.
Defendant contends that the district court erred when it
excluded

the

testimony

of

certain

witnesses

who

would

have

testified that Defendant refused to accept their money as an
investment

in

DCS

after

August

2009.

He

argues

that

such

testimony was relevant to his state of mind, in that it would
have

suggested

that

Defendant
8

took

investor

money

not

to

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facilitate a Ponzi scheme, but rather because, through much of
2009, he believed Black Diamond was legitimate and that a cash
out was imminent.
Assuming without deciding that the district court abused
its discretion in excluding this evidence, any such error was
harmless.

The “‘single most important factor’” in a harmless-

error inquiry is the closeness of the case.

United States v.

Ince, 21 F.3d 576, 584 (4th Cir. 1994) (quoting United States v.
Urbanik, 801 F.2d 692, 699 (4th Cir. 1986)).
Here, as outlined above, the government introduced at trial
overwhelming
solicited

evidence

funds

multiple ways.
withdrawal

by

that

Defendant

intentionally

and

his

misleading

co-conspirators
investors,

in

Even though Black Diamond had stopped fulfilling

requests

and

Defendant

had

stopped

investing

additional money in Black Diamond by the end of April 2009,
Defendant continued to solicit investor money for several more
months, falsely representing that he would invest it.
not

to

mention

other,

more

particularized

false

That is

assertions

Defendant made to investors—for example, about a non-existent
liquidity provider.
Moreover, it was undisputed at trial that Defendant did
eventually
records

stop

for

DCS

accepting
were

new

investments.

introduced

at

trial,

The
and

accounting
Defendant

testified in detail regarding the investors he refused after
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August 2009.
turning

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Indeed, defense counsel incorporated Defendant’s

away

of

investors

into

his

closing

argument.

The

government also accepted that fact as true—before explaining why
it was not dispositive—during its closing.
In short, even if the trial court erred in excluding the
testimony of turned-away investors, it is “‘highly probable that
the error did not affect the judgment.’” Ibisevic, 675 F.3d at
350 (quoting Madden, 38 F.3d at 753).
B.
Defendant further argues that the district court abused its
discretion

in

excluding

as

cumulative

or

irrelevant

certain

evidence related to investments made by DCS other than Black
Diamond.

In particular, Defendant contends that the district

court should have admitted evidence that funds DCS invested in
“Amkel”—a separate venture that also turned out to be a fraud,
though

not

connection
recovered.

one
with

perpetrated
a

by

been

investigation,

government

Defendant—had

and

frozen

in

ultimately

According to Defendant, this evidence would have

shown that DCS was a legitimate investment vehicle with real
value.

Further, Defendant argues that the district court should

have permitted the principal of another failed DCS investment—a
movie production company called “Audience Alliance”—to play a
movie trailer and testify that he intended to repay the loan DCS

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issued to the company.

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This evidence, too, was offered to show

that DCS was not wholly fraudulent.
The

district

court

did

not

abuse

its

discretion

in

concluding that the potential probative value of the Amkel and
Audience Alliance evidence was “substantially outweighed by a
danger of . . . confusing the issues, misleading the jury, undue
delay,

wasting

evidence.”

time,

or

needlessly

presenting

cumulative

Fed. R. Evid. 403.

First,

we

fail

to

see

how

evidence

that

DCS

eventually

recovered frozen funds from a different fraudulent venture is
probative

of

investors.

Defendant’s

lack

of

intent

to

defraud

his

And, as the district court reasonably concluded,

such evidence could very well confuse a jury.
Second,

it

may

be

that

evidence

showing

DCS

invested

partially in Audience Alliance—which, though unsuccessful, was
not

fraudulent—is

defraud.
testified

relevant

However,
as

to

numerous

the

Alliance investment.
its

discretion

Alliance

to

regarding

Defendant’s

witnesses,

existence

and

including

nature

of

intent

to

Defendant,

the

Audience

The district court was therefore within
exclude

investment’s

further

evidence

legitimacy—including

11

of

the

Audience

testimony

from

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Audience

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Alliance’s

principal

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that

he

intended

to

repay

his

debts one day—as cumulative. *
C.
Defendant’s final argument contesting an evidentiary ruling
relates

to

his

conviction

for

tax

evasion.

At

trial,

the

government sought to show that Defendant evaded taxes by falsely
characterizing

$810,000

in

payments

from

Sovereign

Grace

to

Shiloh Estates—the entity that funded the construction of his
home—as a “loan” on his 2008 tax return.

Defendant contends the

district court erred by excluding his 2009 tax return, which
reported the defaulted “loan” as taxable income in 2009.

He

argues that this evidence tends to disprove his intent to evade
taxes in 2008.
The

government’s

theory

of

the

case,

however,

was

that

Defendant mischaracterized the payment as a loan in 2008, and
that this mischaracterization was itself a willful attempt to
evade

income

taxes.

Consequently,

the

relevant

intent

was

Defendant’s intent to repay—or not repay—the loan amount at the
time he received it. See United States v. Pomponio, 563 F.2d
659,

662–63

(4th

Cir.

1977)

(explaining

*

that

the

“principal

To the extent that the district court excluded testimony
from the Audience Alliance principal regarding his intent to
repay his debt in the future on the grounds of relevance, we
likewise consider that ruling to have been a proper exercise of
the court’s discretion.

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question”

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relevant

to

a

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tax

evasion

prosecution

based

on

mischaracterized loan payments is whether those payments “were
not [actually] loans, that is, that no intent to repay them
existed, and that the defendants knew they were not loans”).
That one year later Defendant defaulted on the loan, recognized
it as income, and paid taxes on it tends to reinforce, rather
than undermine, the government’s argument that Defendant did not
intend to repay the “loan” when he received it.
In short, the district court did not abuse its discretion
in excluding the 2009 tax return for lack of relevance.
III.
In addition to challenging evidentiary rulings, Defendant
challenges his tax evasion conviction on grounds that it was not
supported by sufficient evidence, and that the district court
therefore erred in denying his motion for judgment of acquittal
for that count under Rule 29 of the Federal Rules of Criminal
Procedure. [See Appellant’s Br. at 35–39]
This Court will uphold a guilty verdict “if, viewing the
evidence in the light most favorable to the Government, it is
supported by ‘substantial evidence.’”

United States v. Alerre,

430 F.3d 681, 693 (4th Cir. 2005) (quoting United States v.
Burgos,

94

F.3d

849,

862

(4th

Cir.

1996)

(en

banc)).

“[S]ubstantial evidence is evidence that a reasonable finder of
fact

could

accept

as

adequate
13

and

sufficient

to

support

a

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conclusion of a defendant’s guilt beyond a reasonable doubt.”
Burgos, 94 F.3d at 862.

In other words, the relevant question

is whether “any rational trier of fact could have found the
essential

elements

of

the

crime

beyond

a

reasonable

doubt.”

Jackson v. Virginia, 443 U.S. 307, 319 (1979).
The relevant criminal provision, 26 U.S.C. § 7201, makes it
a

felony

to

“willfully

attempt[]

in

any

manner

to

evade

defeat any tax imposed by [the Internal Revenue Code].”

or
To

establish Section 7201 tax evasion, the government must show “1)
that

the

defendant

committed
evasion

an
of

acted

affirmative
tax

act

payments;

deficiency existed.”

willfully;
that

and

3)

2)

that

constituted
that

a

the

defendant

an

attempted

substantial

tax

United States v. Wilson, 118 F.3d 228, 236

(4th Cir. 1997); see also Sansone v. United States, 380 U.S.
343, 351 (1965).
‘any

conduct

concealing.’”

“The jury may infer a ‘willful attempt’ from

having

the

likely

effect

of

misleading

or

Wilson, 118 F.3d at 236 (quoting United States v.

Goodyear, 649 F.2d 226, 228 (4th Cir. 1981)).
Here,

as

discussed

above,

the

government

theorized

that

Defendant falsely characterized the $810,000 he transferred from
Sovereign Grace to Shiloh Estates as a loan on his 2008 tax
return in order to avoid paying taxes on that amount in that
year.

It is settled law that what defines a true loan is “the

taxpayer’s own intention to repay” the loan amount.
14

Pomponio,

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563 F.2d at 662; see also Comm’r of Internal Revenue v. Tufts,
461 U.S. 300, 307 (1983) (“When a taxpayer receives a loan, he
incurs an obligation to repay that loan at some future date.
Because of this obligation, the loan proceeds do not qualify as
income to the taxpayer.”); United States v. Beavers, 756 F.3d
1044, 1057 (7th Cir. 2014) (explaining that “loan proceeds are
not

income

obligation

because
to

repay

the
the

taxpayer
loan”

has

and

incurred

that

“the

a

genuine

recipient

must

actually intend to repay” for a transaction to qualify as a
loan).
Defendant

does

not

dispute

that

he

characterized

the

$810,000 transfer as a loan on his 2008 tax return or that there
was a resulting tax deficiency in that year.

Consequently, the

relevant legal question is whether Defendant’s characterization
of the transfer as a loan on his tax return was accurate, i.e.,
“whether the evidence was sufficient for the jury to have found
beyond
loan[],

a

reasonable
that

is,

doubt

that

that

no

the

intent

[transfer
to

repay

was]
[it]

not

[a]

existed.”

Pomponio, 563 F.2d at 662–63.
In answering that question, both direct evidence of intent
and

circumstantial

evidence

transaction are relevant.

regarding

the

nature

of

the

See id. at 663 (finding sufficient

evidence that various advances were not loans where there was no
fixed repayment date, no notes evidencing the debt, no security
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backing it, and no interest charged or paid on the amount); see
also Merck & Co. v. United States, 652 F.3d 475, 481 (3d Cir.
2011) (“[D]etermining whether a transaction qualifies as a loan
requires analysis both of the objective characteristics of the
transaction and of the parties’ intentions.”).
The

government

introduced

direct

and

circumstantial

evidence that Defendant did not intend to repay the $810,000
transfer when he received it, and therefore that the transaction
was

taxable

income,

rather

than

a

loan.

Barry

McFerren,

Defendant’s brother-in-law and employee, testified that in the
fall of 2008 Defendant said that he intended from the beginning
to

default

on

the

purported

loan,

i.e.,

not

to

repay

it.

Defendant did in fact default on the purported loan in December
2009.
her

Lynn Wymer, Defendant’s accountant, testified that, to
knowledge,

there

was

no

interest

rate

governing

the

purported loan, no loan document, no repayment schedule, no loan
payments made, and no lien securing it.
investigator,

similarly

testified

Tyiesha Nixon, an IRS

that,

after

examining

Defendant’s tax returns, accounting records, and other related
financial

documents,

she

found

no

loan

documents,

nothing

indicating an interest rate on the purported loan, no schedule
of payments, and no lien securing it.
In

short,

there

was

sufficient

evidence

that

Defendant

falsely characterized the $810,000 transfer as a loan on his
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2008 tax return.
from

‘any

Pg: 17 of 18

Because jurors “may infer a ‘willful attempt’

conduct

having

the

likely

effect

of

misleading

or

concealing,’” Wilson, 118 F.3d at 236 (quoting Goodyear, 649
F.2d at 228), there also was sufficient evidence that Defendant
attempted to evade the payment of taxes in 2008.

We therefore

affirm the district court’s denial of Defendant’s motion for
acquittal on the tax evasion count.
IV.
Finally,

Defendant

challenges

the

district

court’s

restitution order, primarily on the ground that his convictions
for conspiracy to commit wire fraud and money laundering are
invalid.
fails.

Because we affirm those convictions, that argument
Defendant

also

suggests

that

the

district

court

neglected to consider amounts already available to victims from
other sources, such as the funds recovered from the fraudulent
Amkel

investment.

argument.

In

The

record,

particular,

the

however,

district

contradicts

court

that

clarified

that

“[t]o the extent that there are funds available to offset the
total

amount

of

restitution,

those

restitution process.” J.A. 997–98.

will

be

applied

in

the

Furthermore, the judgment

expressly limits “victims’ recovery . . . to the amount of their
loss,”

so

that

Defendant’s

“liability

for

restitution

[will]

cease[] if and when the victim(s) receive full restitution.”
J.A. 1075.
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We

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therefore

reject

Pg: 18 of 18

Defendant’s

challenge

to

the

restitution order.
V.
For

the

reasons

stated

above,

we

affirm

the

challenged

convictions and the restitution order.
AFFIRMED

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