Appeal from the United States District Court for the District of Maryland, at Baltimore. Joseph C. Howard, United States District Judge. CA-83-4198.
Murnaghan, Sprouse, and Chapman, Circuit Judges.
The controversy underlying this appeal involved a tax shelter investment in coal mines which the appellees contend was a scheme to defraud investors, but which the appellants assert was simply a risky investment that went awry.
Irving Cohen and the Halajen Development Corporation appeal a district court judgment awarding Daniel Morley and William Evans*fn1 $265,940 trebled after a jury found for them on RICO*fn2 and state law claims. Cohen raises a plethora of issues on appeal, including the sufficiency of the evidence, the admission of certain evidence, and the court's subsequent award of $258,162 in attorneys' fees. On these matters, we affirm the decision of the court below. However, we reverse the district court's refusal to reduce the judgment by the amount of a codefendant's settlement.
In 1976 Morley and Evans requested a partner with the brokerage firm of Baker, Watts & Company to recommend investments with tax shelter opportunities. The partner advised them about Mountainview Associates, a limited partnership formed to lease and mine Kentucky coal. Mountainview's general partner was Halajen, a subchapter S corporation of which Cohen was the sole shareholder.
The Mountainview Confidential Descriptive Memorandum (CDM) misrepresented the role of an engineering company in the operation. It did not disclose that a convicted securities felon, Alexander Guterma, was actively involved in the company hired to mine the Mountainview coal. Nor did it mention that Mountainview's accountant, Marvin Rosenbaum, had just pled guilty to securities fraud.*fn3 Morley also contended that the CDM misrepresented Mountainview's compliance with IRS regulations to receive favorable tax treatment. (Cohen later sent an Addendum explaining tax law changes but indicating the investments should receive favorable tax treatment.) The CDM did disclose, however, that Cohen would receive an organizational fee of $300,000 and a management fee of $150,000.
In October 1976, Morley invested $50,000 in Mountainview; Evans invested $100,000. During that same period, Cohen-controlled corporations withdrew nearly two million dollars from six coal entities, including Mountainview. When, in mid-to-late 1977, Cohen sent a letter to the investors explaining that one of his advisors had a prior conviction for violating securities laws and offering them an opportunity to rescind their investments, they did not act. Instead, having received income distributions from the Mountainview venture, Morley and Evans invested $40,000 and $80,000 respectively in another Halajen project, Newport Coal Associates. By that time, Cohen was himself the target of an SEC investigation. He did not inform his investors about the probe, either through correspondence or at a face-to-face meeting in November 1977.
That same month, the Wall Street Journal carried a story concerning Guterma's death in a plane crash. The article characterized him as a financial manipulator and securities felon whose wife's estate was involved in a dispute with Cohen over coal assets. A lawyer testified that he sent the article to Morley and Evans in 1978, but they testified they never received it. Cohen referred to the article in a letter to them that year.
In correspondence with the investors, Cohen wrote of problems with coal prices, miners, permits, and equipment. He also indicated that the death of Guterma impeded Mountainview mining. However, the letters offered assurances of the continuing vitality of the mines, in spite of such setbacks. Meanwhile, mining operations waned at Mountainview; they were never begun at Newport Coal.
It was not until February 1981 that Cohen sent Morley a letter concerning an SEC investigation and settlement relating to Mountainview. Morley said that letter alerted the investors to the "con," and triggered their own probe.
In December 1983 Morley filed a complaint in the district court against Cohen and his coal entities; it was amended to add the Baker, Watts brokerage.*fn4 Baker, Watts settled prior to trial for $225,000. The court refused Cohen's request for a separate trial on statute of limitations issues, but granted his motion to quash Morley's subpoena requiring him to appear at trial. Midway through the trial in July 1988, Cohen asked the court to limit cross-examination so that he would be able to appear without the risk of asserting his fifth amendment privilege against self-incrimination. The district court denied this motion, and the trial continued without the presence of Cohen.
The jury returned a verdict against Cohen, awarding Morley $265,940 for RICO violations, and $514,122.98 for common law fraud, breach of contract, conversion, and breach of fiduciary duty. The trial judge ruled these damages duplicative and entered judgment of $265,940 trebled on the RICO count only. He also denied Cohen's motion for judgment notwithstanding the verdict. In December 1988 the judge granted Morley's motion for attorneys' fees and ordered Cohen to pay $258,162. Cohen appealed.
Sufficiency of the Evidence on the RICO Claim
Despite Cohen's contentions to the contrary, we find the evidence sufficient to support the judgment on the RICO count. To establish a civil RICO case, the plaintiff must prove "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985) (footnote omitted). Racketeering activity includes the predicate acts of mail and wire fraud, the offenses at issue in the present case. See 18 U.S.C. §§ 1961(1), 1341, 1343. To succeed in an action, the plaintiff must prove that he was "injured in his business or property." Id. at § 1964(c). Cohen argues that Morley failed to prove three of these requirements: predicate acts, pattern, and consequent economic injury. We address his contentions relating to each.
The offenses of mail and wire fraud require use of the mails or wires coupled with an intent to defraud. See 18 U.S.C. §§ 1341, 1343. Cohen argues that both elements are absent from the proof Morley presented to the jury.
He stresses that the mail and wire communications between Cohen and Morley took place after Morley's investments in Cohen's coal projects. This argument, however, can give him no comfort. It is settled that the statutes encompass use of the mails or wires after the initial financial transaction when such use is "designed to lull the victims into a false sense of security, postpone their ultimate complaint to the authorities, and therefore make the apprehension of the defendants less likely than if no mailings had taken place." United States v. Maze, 414 U.S. 395, 403, 38 L. Ed. 2d 603, 94 S. Ct. 645 (1974). The key is whether the communication occurred "for the purpose of executing the scheme." Kann v. United States, 323 U.S. 88, 94, 89 L. Ed. 88, 65 S. Ct. 148 (1944). Compare United States v. Lane, 474 U.S. 438, 451-53 & n. 16, 88 L. Ed. 2d 814, 106 S. Ct. 725 (1986); United States v. Sampson, 371 U.S. 75, 9 L. Ed. 2d 136, 83 S. Ct. 173 (1962); ...