On appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Crim. No. 91-00060)
Before: Greenberg and Scirica, Circuit Judges, and Debevoise, District Judge*fn*
GREENBERG, Circuit Judge :
Leonard A. Pelullo appeals from a judgment of conviction entered in the United States District Court for the Eastern District of Pennsylvania following a three-week jury trial. The jury convicted Pelullo of 49 counts of wire fraud in violation of 18 U.S.C. § 1343, and one count of racketeering under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(c) and 1963. He was, however, acquitted of five additional counts of wire fraud. On August 30, 1991, Pelullo was sentenced to a term of 24 years' imprisonment, assessed $4,400,000 in fines, and ordered to pay restitution of $2,071,000 and $114,000.
On appeal, Pelullo argues that the district court erred in: (1) failing to conduct an adequate charge conference under Fed. R. Crim. P. 30; (2) charging RICO's "pattern of racketeering activity" and "enterprise" elements; (3) charging on the wire fraud counts as the charge permitted the jury to convict Pelullo for violating his civil fiduciary duties; (4) ruling on the statute of limitations defense to the wire fraud counts; (5) admitting inadmissible bank documents without proper foundation in evidence; (6) admitting inadmissible summaries under Fed. R. Evid. 1006; (7) preventing him from attacking the credibility of government witnesses in summation; and (8) admitting crucial hearsay testimony of an informant, Philip Leonetti.
We find that the court permitted a substantial amount of hearsay in the form of bank documents and summaries prepared by an FBI agent, Randall Wolverton, to be admitted at trial even though the Government failed to satisfy any of the hearsay exceptions justifying its admission. Because we cannot conclude that the admission of this evidence was harmless, we will reverse the judgment of conviction and remand for a new trial on all counts except count 54, a mail fraud count, on which we are satisfied that any error was harmless. We also conclude that the court erred in charging the jury under RICO with respect to the "pattern of racketeering activity" and "enterprise." Although these errors as well as other errors in other matters which we also consider either may have been or were harmless, since the issues involved are likely to resurface on remand we will address them as well. Of course, we also consider the statute of limitations issues, as a ruling on that point in favor of Pelullo could bar a retrial on the wire fraud counts.
We set forth the evidence at length as this is required for an understanding of this case, our description being from a view of the evidence in a light favorable to the Government as the verdict winner. The indictment charged Pelullo with engaging in a pattern of illegal racketeering activity by abusing his position as chief executive officer of The Royale Group, Limited ("Royale"), a publicly held corporation. In the fall of 1983, Royale, through wholly owned subsidiaries, acquired six "art deco" hotels in Miami Beach, Florida: the Cardozo, the Victor, the Senator, the Leslie, the Carlyle and the Cavalier. In June 1984 the hotels obtained a $13.5 million loan from FCA Mortgage Corporation ("FCA Mortgage"), a wholly owned subsidiary of American Savings and Loan Association ("American"). Approximately $10 million of the loan was earmarked for acquisition costs, while the remaining $3.5 million was to be used for renovation. The loan was increased twice, by $2.2 million in January 1985 and $1.4 million in September 1985. By September 1985, $6.2 million of the loan proceeds was to be used for renovation. Under the agreement, American retained this portion of the loan and would disburse funds as the renovation costs were incurred. To obtain a disbursement, Royale was required to submit draw requests setting forth a certified itemization of these costs.
The indictment charged Pelullo with three fraudulent schemes. First, the Government alleged that Pelullo defrauded American, Royale and Royale's shareholders of approximately $1.6 million by submitting false documentation in connection with certain draw requests on the project. This scheme is reflected in wire fraud counts 1 through 53 and racketeering acts 1 through 59 of count 55, the RICO count, which referred to the same transfers as those in the wire fraud counts, as well as several additional transfers. The second scheme, reflected in wire fraud count 54 and RICO racketeering act 60, involved Pelullo's defrauding Royale of $114,000 in February 1986 by diverting cash from one of its subsidiaries to repay a debt Pelullo owed to a loanshark connected with the Philadelphia mafia. The third scheme, which is reflected only in racketeering acts 61-72, and not in individual wire fraud counts, charged Pelullo with defrauding Royale of approximately $500,000 by diverting money for uses other than the purposes of the loans that American had loaned to Royale.
Under the terms of the loan Royale was permitted to draw loan money to pay for so-called "hard costs" associated with the renovation work, such as labor, materials and supplies. Pelullo, who certified most of the draw requests, overstated the renovation costs and submitted false documentation upon which American relied to support these costs.
Pelullo directed the bank to transfer the disbursements by wire transfers to Delta Development and Construction Corporation ("Delta"), a company owned and controlled by Pelullo or his family, which acted as general contractor for the renovation project. He thereupon diverted the proceeds for his personal use through various corporations he owned and controlled. Some of the proceeds were used to purchase or run two farms in Chester County, Pennsylvania; to purchase a sheep ranch in Montana; for operating corporations set up to run restaurants in the Philadelphia area; and to repay a loan on behalf of his father. In addition, $100,000 of the loan was converted to cash and delivered to Pelullo at a casino in Puerto Rico.
Pelullo's intentional failure to disclose to Royale's board of directors information pertaining to the use of the loan proceeds was a significant theme throughout the Government's case. The Government introduced evidence that Pelullo failed to maintain adequate financial records of the renovation costs and disbursements, withheld financial records from Royale's independent auditors, and delayed filing financial disclosure reports required by the Securities and Exchange Act of 1934. The Government maintained that, if Royale had kept proper accounting records, the Royale board and its shareholders would have known exactly how Pelullo was using its money.
For example, the evidence showed that Pelullo prevented Royale's outside auditors from viewing bank records of Delta and other related corporations. When Touche Ross & Company, Royale's public accountants, advised Pelullo that it could not certify Royale's financial statements without these records, Pelullo fired Touche Ross. Coopers & Lybrand replaced Touche Ross, but then withdrew from Royale's audit after Pelullo similarly refused to disclose documents relating to the renovation costs for the hotels.
Additionally, several witnesses testified regarding Pelullo's failure to act in accordance with his responsibilities as a corporate officer. One, Professor John C. Coffee, Jr., testified as to the fiduciary duties imposed on corporate officers by state corporation law and federal securities law.
Agent Wolverton's testimony was very significant in establishing that there were fraudulent wire transfers. He traced Pelullo's diversion of funds by an analysis of subpoenaed bank records of Royale, Delta and other Pelullo-controlled companies. His analysis was also based on numerous interviews he conducted over the course of his investigation. Wolverton concluded that Pelullo diverted loan proceeds of $1,603,894.71 through the first scheme and $471,500 through the third scheme. The first scheme related to loan proceeds earmarked for "hard costs," i.e. actual renovation work, while the third scheme related to "soft costs," i.e. overhead and administrative expenses. Agent Wolverton prepared summaries of the diversions, which were admitted as Government exhibits over Pelullo's objections.
The evidence with respect to the second scheme showed that Pelullo obtained a personal loan from one Anthony DiSalvo. When Pelullo failed to repay the loan, DiSalvo sought the assistance of Philip Leonetti and Nicodemo Scarfo, respectively the underboss and boss of the Philadelphia mafia. After meeting with Leonetti and Scarfo, Pelullo diverted $114,000 from a bank account of Palm Beach Heights Development Corporation ("PBH"), another Royale wholly owned subsidiary. The funds were then wired to a corporation in Philadelphia and, on February 25, 1986, were converted to cash and delivered to DiSalvo. Leonetti, a government informant, testified that Pelullo paid $90,000 in cash to DiSalvo around the time of the $114,000 wire transfer. At trial, Pelullo did not dispute the existence of the debt, but testified that he repaid it by mortgaging real estate that he owned. Pelullo's father, Peter Pelullo, Sr., who received the wire transfer and who served as job supervisor for the renovation project, testified that the $114,000 constituted a partial payment for his work on the hotel project.
ADMISSION OF BANK DOCUMENTS AND SUMMARIES
To the extent the district court's admission of evidence was based on an interpretation of the Federal Rules of Evidence, our standard of review is plenary. But we review the court's decision to admit the evidence if premised on a permissible view of the law for an abuse of discretion. United States v. Furst, 886 F.2d 558, 571 (3d Cir. 1989), cert. denied, 493 U.S. 1062, 110 S. Ct. 878, 107 L. Ed. 2d 961 (1990).
At trial, Wolverton, who is a certified public accountant, described how he traced funds diverted by Pelullo, by examining subpoenaed wire transfer documents, statements and checks. Wolverton testified that wire transfer documents are bank-generated documents that record the date, amount and source and destination account numbers of each wire transfer. The court admitted these documents over Pelullo's objections that the evidence was hearsay.
The documents were hearsay. Each was an out-of-court statement offered to prove the truth of the facts described in the document, such as the identity of the sender and recipient, and the amount of the transaction.*fn2 Cf. United States v. Hathaway, 798 F.2d 902, 905-08 (6th Cir. 1986) (in mail and wire fraud prosecution arising out of fraudulent investment schemes, transaction statements, trade tickets, advertising materials, cancelled checks, client files, correspondence and client account agreements were only admissible because these documents were not offered for truth of the matters asserted therein but were offered to prove defendant's possession of the documents).
The Government makes a litany of arguments in support of the admissibility of the documents. Initially, it contends that the documents were not hearsay since, as records of corporations controlled by Pelullo, they constituted admissions. However, while the documents purport to record transactions of Pelullo-controlled companies, the testimony shows that these were bank records and not records made by Pelullo or corporations controlled by him. Additionally, there is nothing in the record to indicate that Pelullo directed or authorized the creation of any of the documents.*fn3 Thus, the documents cannot be admissions since they are not attributable to Pelullo or to corporations controlled by him.
At oral argument before us the Government argued that the documents were adoptive admissions since they were sent to Pelullo and he failed to deny their accuracy. See Fed. R. Evid. 801(d)(2)(B). Again, however, there is nothing in the record that establishes this significant fact. In fact, the record shows the contrary. Following Pelullo's hearsay objections, Mr. Cole (the Assistant United States Attorney) elicited the following from Agent Wolverton on direct examination:
Q: Just for the record, [these are] government exhibits 15 through 84, government exhibit 87 and government exhibit 161. Would you tell the jury what these documents are and how they tie into your schedules:
A: These relate to each of the wire transfers that are on my schedules and they will show records concerning the receipt of the money and what happened to the money when it was traced out of the accounts. . . .
Q: Are they all bank documents?
Q: And were they all--how were they all obtained?
A: Through the use of grand jury subpoenas.
6/26/91, 10:01:56 - 10:02:42 (emphasis added).*fn4
Additionally, the government argues that, even if the documents were hearsay, they were admissible under the business records exception to the hearsay rule. Fed. R. Evid. 803(6). The business records exception permits admission of documents containing hearsay provided foundation testimony is made by "the custodian or other qualified witness," that: (1) the declarant in the records had personal knowledge to make accurate statements; (2) the declarant recorded the statements contemporaneously with the actions that were the subject of the reports; (3) the declarant made the record in the regular course of the business activity; and (4) such records were regularly kept by the business. Furst, 886 F.2d at 571; Fed. R. Evid. 803(6).*fn5 With the exception of certain documents relating to counts 7, 11, 14, 49 and 54 (racketeering acts 10, 14, 17, 55 and 60), however, no such foundation was ever laid for their admission.*fn6
The Government, citing Furst, 886 F.2d at 572, and Hathaway, 798 F.2d at 905-07, contends that the documents could have been admitted even without testimony of a custodian since surrounding circumstances provided the necessary foundation for trustworthiness. Here, the Government maintains that there are sufficient circumstantial guarantees of trustworthiness since: (1) the records were obtained in response to grand jury subpoenas directed to the corporations and their banks; (2) testimony of witnesses involved in the transactions corroborated the information in the bank records; and (3) Pelullo has not stated any reason why the records are not reliable. However, these reasons are not sufficient to overcome the express requirements of Rule 803(6).
It is, of course, true that Rule 803(6) does not require foundation testimony from the custodian of records for the rule states that such testimony may be provided by either the custodian or "other qualified witness." Furthermore, "the phrase 'other qualified witness' should be given the broadest interpretation; he need not be an employee of the entity so long as he understands the system." 4 Jack B. Weinstein & Margaret A. Berger, Weinstein's Evidence para. 803(6), at 803-178 (footnote omitted) (hereinafter "Weinstein & Berger"). Thus, courts have held that a government agent may provide a foundation where the agent is familiar with the record-keeping system. See, e.g., United States v. Franco, 874 F.2d 1136, 1139-40 (7th Cir. 1989); see also Hathaway, 798 F.2d at 906 ("there is no reason why a proper foundation for application of Rule 803(6) cannot be laid, in part or in whole, by the testimony of a government agent"). In In re Japanese Elec. Prod. Antitrust Litig., 723 F.2d 238, 288 (3d Cir. 1983), rev'd on other grounds sub. nom. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986), we approved of the district court's holding that:
'the testimony of the custodian or other qualified witness is not a sine qua non of admissibility in the occasional case where the requirements for qualification as a business record can be met by documentary evidence, affidavits, or admissions of the parties, i.e., by circumstantial evidence, or by a combination of direct and circumstantial evidence.'
Id. (quoting Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 505 F. Supp. 1190, 1236 (E.D. Pa. 1980)) (emphasis added).
However, none of these authorities holds that the court may admit into evidence under the business exception to the hearsay rule documents containing hearsay simply because there are some indicia of the trustworthiness of the statements.*fn7 While a noncustodial witness such as a government agent, or even documentary evidence, may be used to lay the foundation required by Rule 803(6), that witness or those documents must still demonstrate that the records were made contemporaneously with the act the documents purport to record by someone with knowledge of the subject matter, that they were made in the regular course of business, and that such records were regularly kept by the business. Cf. Franco, 874 F.2d at 1140 (agent gave thorough description of the manner in which records were prepared and maintained based on agent's conversations with owner and employee of business as well as agent's own observations); Hathaway, 798 F.2d at 906 (FBI agent permitted to lay foundation where agent had familiarity with the record-keeping system). But see United States v. Hines, 564 F.2d 925, 928 (10th Cir. 1977) (automobile manufacturers' invoices admissible without foundation since such documents possess a high degree of trustworthiness and necessity of admitting them outweighs inconvenience in having custodian testify), cert. denied, 434 U.S. 1022, 98 S. Ct. 748, 54 L. Ed. 2d 770 (1978). Here, Agent Wolverton did not purport to have familiarity with the record-keeping system of the banks, nor did he attest to any of the other requirements of Rule 803(6). Therefore, as proponent of the evidence, the Government failed to lay a proper foundation as required by the business records exception.
Alternatively, the Government argues that the documents were admissible under Rule 803(24), the residual hearsay exception. That provision creates a general exception to the inadmissibility of hearsay where there are adequate "circumstantial guarantees of trustworthiness . . . ." Fed. R. Evid. 803(24). But Rule 803(24) is subject to the following proviso: "However, a statement may not be admitted under this exception unless the proponent of it makes known to the adverse party sufficiently in advance of trial or hearing to provide the adverse party with a fair opportunity to prepare to meet it, the proponent's intention to offer the statement and the particulars of it, including name and address of declarant." Id. If notice is given, the statement(s) may be admitted where there are:
equivalent circumstantial guarantees of trustworthiness [to the other hearsay exceptions], if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of Justice will best be served by admission of the statement into evidence.
Bank documents like other business records provide circumstantial guarantees of trustworthiness because the banks and their customers rely on their accuracy in the course of their business. In fact, in the context of discussing the foundation requirements of the business records exception, one leading authority has noted that "[a] foundation for admissibility may at times be predicated on judicial notice of the nature of the business and the nature of the records as observed by the court, particularly in the case of bank and similar statements." 4 Weinstein & Berger para. 803(6), at 803-178 (emphasis added) (footnote omitted); see also Karme v. Commissioner, 673 F.2d 1062, 1064-65 (9th Cir. 1982) (bank records provided pursuant to treaty admissible under Rule 803(24) given circumstantial guarantees of trustworthiness even though inadmissable as business records because there was no foundation testimony). Nevertheless, the residual hearsay exception may not be used as a substitute for the business records exception when counsel has not complied with the requirements of 803(6) unless the requirements of Rule 803(24) have been met. Cf. In re Japanese Elec. Prod. Antitrust Litig., 723 F.2d at 302 (courts may consider admissibility of documents under Rule 803(24) despite having failed the requirements of another exception; rejecting "near miss" theory).
The Government, in an attempt to satisfy the notice requirement, argues that the documents were made available to Pelullo months before trial. Although Rule 803(24) may be read as requiring only that the proponent give notice of the hearsay statement (and its particulars, including the name and address of the declarant), in Furst we construed the notice provision to require the proponent to give notice of its intention specifically to rely on the rule as grounds for admissibility. See Furst, 886 F.2d at 574. See also United States v. Tafollo-Cardenas, 897 F.2d 976, 980 (9th Cir. 1990) (prosecutor must give notice of Rule 803(24) as basis for admissibility); but see United States v. Benavente Gomez, 921 F.2d 378, 384 (1st Cir. 1990) (requiring that notice be given of the existence of the evidence). At oral argument, the Government conceded that it did not notify Pelullo that it intended to rely on the residual exception to the hearsay rule for admission of the documents. Therefore, under Furst, it may not rely on Rule 803(24) as a basis for admissibility.
In addition, because the Government first made the "residual exception" argument on appeal, the district court did not make any findings regarding the statements' or documents' admissibility under Rule 803(24), and perhaps we should not consider their admissibility for this reason alone. See, e.g. Tafollo-Cardenas, 897 F.2d at 980 (prosecutor must either state the exception as grounds for the admissibility or district court must find that the statement met requirements of the rule in order for appellate court to consider admissibility of statement under 803(24)); but cf. United States v. Nivica, 887 F.2d 1110, 1127 (1st Cir. 1989) ("If the trier incorrectly admits evidence under a hearsay exception, we will not reverse so long as the material was properly admissible for the same purpose under a different rule of evidence"), cert. denied, 494 U.S. 1005, 110 S. Ct. 1300, 108 L. Ed. 2d 477 (1990). While the reasoning of Nivica may be preferable where it is clear that the district court's error in admitting evidence was harmless, we are unwilling to dispense in this case with the requirement of notice expressly provided for in Rule 803(24). Additionally, Rule 803(24) requires that the court make factual findings and the district court is in a better position to make these findings in the first instance, such as that the statement is more probative on the point for which it is offered than any other evidence that the proponent can procure through reasonable efforts. See 4 Weinstein & Berger para. 803(24), at 803-373-79. Furthermore, although the court of appeals in Nivica relied on Rule 803(24) where the district court erroneously relied on Rule 803(6) to admit certain bank records, the district court in that case made express findings that the documents were authentic, reliable and trustworthy and that, given the provenance and character of the materials, their admission was justified. See 887 F.2d at 1127. The district court did not make such findings here. Accordingly, Rule 803(24) does not support the Government's position.
Much has been made by the Government of the inherent trustworthiness of the documents at issue in this case. It has repeatedly stressed that these documents are nothing more than ordinary bank statements and the like, obtained by subpoena. We recognize that the Government relied on not a few but many such documents in presenting its case, and we are not unmindful of the purposes of the Federal Rules of Evidence, as stated in Rule 102:
These rules shall be construed to secure fairness in administration, elimination of unjustifiable expense and delay, and promotion of growth and development of the law of evidence to the end that the truth may be ascertained and proceedings justly determined.
Moreover, we recognize that, given Pelullo's theory of defense, the policies underlying the hearsay rule may have been only marginally implicated by the admission of these documents. The hearsay rule provides that an out-of-court statement cannot be admitted for the truth of the matter asserted since the statement is inherently untrustworthy: the declarant may not have been under oath at the time of the statement, his or her credibility cannot be evaluated at trial, and he or she cannot be cross-examined. The documents at issue here were admitted to prove that transfers of funds were made to individuals and entities in specific amounts. As indicated above, they are out-of-court statements by a declarant that the transactions took place in the manner described by the documents, which is what they were offered to prove. At trial, however, Pelullo's defense was not predicated on a denial that the transactions had occurred in the manner described, though he preserved his objection to the admissibility of the evidence, but rather that the transfers were not fraudulent at all. Thus, considering the trustworthiness of the documents and Pelullo's theory of his case, we are tempted to question whether Pelullo has been prejudiced by the admission of these documents.
In the final analysis, however, an accused is under no duty to rebut bare allegations by the prosecutor that documents are what they purport to be and establish the truth of what they represent. Cf. Fed. R. Evid. 901 (dealing with requirements for authentication or identification). Business records are not self-proving documents as public records may be. See Fed. R. Evid. 803(8). In our view, the goals underlying the Federal Rules of Evidence would not be furthered by upholding the admissibility of these documents as the record now stands, since to do so we would necessarily eviscerate the requirements of Rules 803(6) and 803(24). Although the Federal Rules of Evidence are to be liberally construed in favor of admissibility, this does not mean that we may ignore requirements of specific provisions merely because we view the proferred evidence as trustworthy. We thus conclude that the documents constitute hearsay, that they were not admissible under the business records exception since a proper foundation for them was not laid, that the residual hearsay exception was inapplicable since ...