On Appeal From the United States District Court for the Western District of Pennsylvania. (D.C. Criminal No. 91-00026-1E).
Before: Becker, Nygaard and Alito, Circuit Judges.
John Copple, former President of Mechem Financial, Inc., ("Mechem"), an investment firm specializing in the management of "pre-need" funeral funds, was convicted by a jury of mail fraud, 18 U.S.C. §§ 1341, 1342, and income tax evasion, 26 U.S.C. § 7201. The district court sentenced him to 71 months imprisonment, a $100,000 fine and three years supervised release, and ordered him to pay over $4 million in restitution. In this appeal, Copple challenges both his conviction and sentence.
Copple challenges his conviction on two principal grounds. First, he argues that the government failed to comply with the requirements of 26 U.S.C. § 6103(h)(5) (which requires the IRS to report whether a prospective juror has been the subject of an audit or other tax investigation) when it limited the scope of the investigation into the jurors' tax records to records since 1986. According to Copple, he is entitled to a new trial because the district court did not strike the entire jury panel after the limitation on the investigation had been disclosed. Reading a reasonableness limitation into the statute, however, we conclude that the requirements of § 6103(h)(5) were met in this case and that the district court did not err when it refused to strike the jury panel. Second, Copple argues that the district court abused its discretion in admitting victim impact testimony that was irrelevant and highly prejudicial. Although we agree with Copple that the admission of the victim impact testimony was error, we believe the error was harmless given the overwhelming evidence of Copple's guilt. We therefore affirm the conviction.
However, we must vacate the judgment of sentence and remand the case for resentencing for two reasons. First, the district court increased Copple's offense level four levels because of the amount of money involved and the large number of victims, which, whether viewed as an enhancement under § 2F1.1(b)(2) or as an upward departure, was improper; second, the court ordered Copple to pay restitution without making the required findings about Copple's ability to pay. On remand, the district court is free to reconsider alternative grounds for upward departure or increase in the offense level mentioned in the original presentence report but not factored into the original sentence. It also must support any order of restitution with factual findings about Copple's ability to pay the order, the financial need of his family, and the relationship between the loss caused and Copple's conduct.
Over the years a practice has developed in the funeral home business whereby persons who wish to rest assured that their funeral needs are taken care of in the event of a sudden or unexpected death may purchase "pre-need" funeral plans with the funeral director of their choice. In 1986, two Pennsylvania funeral directors, W. James Scott and Michael Orlando, realizing that many funeral directors who had sold "pre-need" funeral plans did not have the time or expertise to manage the plan funds, or to deal with the tax, accounting, and disbursement problems associated with the funds even when they had turned the funds over to conventional trust management plans, conceived of a business idea -- a money management firm specializing in "pre-need" funeral accounts. As funeral directors themselves, however, Scott and Orlando lacked the expertise needed to make such a company successful, and hence they sought the aid of someone with considerable experience as an insurance agent and financial planner, defendant Copple.
Copple jumped at the chance to run a money management business like the one Scott and Orlando proposed. He offered to put up $50,000 if Scott and Orlando would contribute their expertise in the funeral business to the venture. They agreed, and Mechem was formed. Copple became president, and Scott and Orlando became "silent partners." Copple promised to oversee the investment decisions himself and to invest the money in "the safest place."*fn1
Copple sold funeral directors on Mechem's services with promises of high yields and low risk. He directed his staff to tell the funeral directors that Mechem invested the "pre-need" funds in high yield, low risk annuities and treasury bonds. Mechem sent letters via the United States mail stating that the money had been invested with reputable insurance companies like John Hancock, Connecticut Mutual, New England Mutual Life, and others. One letter told the funeral directors that "our investments have been made in insurance companies, annuities, T-bills, long term municipal bond funds, short-term CD's and money markets. Our performance has reflected our excellent investment posture for the last fifteen years."
Copple also had Mechem send out letters representing that it was fidelity bonded. In particular, the letters pointed to a policy issued by an agent named James Domino, a bond issued by the Maryland Casualty Insurance Company, and certain Lloyds of London bond certificates. In addition, Mechem issued quarterly statements to the funeral directors reporting the interest that had accrued on their "pre-need" funds. The sales technique worked. Eventually, about $5 million in "pre-need" account money from Pennsylvania funeral directors made its way into Mechem's coffers. Ohio and Massachusetts funeral directors deposited an additional $7 million.*fn2
Although Mechem and Copple promised the funeral directors high yields and low risk, they gave them neither. Copple did not invest any of the money he received for Mechem in annuities, treasury bills or any similar investments. Mechem had never purchased any fidelity bond. The Maryland Casualty Bond, for example, was actually a general liability policy that a salesman had altered, at Copple's direction, to make it look like a fidelity or surety bond. And the quarterly reports of interest earned were complete fabrications.
Copple actually used most of the money for speculative investments and conspicuous personal consumption. During the three year life of Mechem corporation, Copple bought $5.7 million of rare coins, used $2.8 million to run Mechem, applied $1 million to pay death claims, and spent about $2.5 million on himself. His personal expenses during the time he was running Mechem were lavish to say the least. They included: $228,000 for a building project on his home, $196,334 for furniture, $62,081 for jewelry from Les Crago, $70,279 for jewelry from Fortunoff's, $398,000 for jewelry from Neiman-Marcus, $48,712 for a sable coat, $480,000 for gifts to his family, and a host of similar purchases.
The inevitable occurred in 1989. After rumors surfaced that Mechem could no longer pay the funeral expenses for the "pre-need" accounts and that Copple had invested all of the money in rare coins, the funeral directors made a run on Mechem. Many of the funeral directors asked Mechem to "roll-over" their funds into other money management companies, but Mechem no longer had the money to meet these demands. It filed for bankruptcy in 1990.
While administering the bankruptcy, the trustee discovered Copple's serious mishandling of the Mechem "pre-need" account funds. He discovered that all but $250,000 of the individual "pre-need" account money that had been initially placed in the Mechem investment account had been transferred to the John R. Copple account, from which both business and personal disbursements were made. Some of the assets were still in Copple's hands. Copple turned over to the trustee the rare coins, which were sold at auction for $209,045. The trustee took control of four bank accounts which contained $68,875.73 and an escrow account containing $210,480.78. He also secured the return of a $110,000 deposit that Copple had placed at Neiman-Marcus for the purchase of a 38.33 carat diamond. Most of the money, however, was gone. At last count, the creditors, including the funeral directors, will recoup about twelve cents on the dollar.*fn3 The total amount of money lost by the victims relevant to this criminal case was $4,257,940.45.
On October 17, 1991 a grand jury in the Western District of Pennsylvania returned a 37-count indictment charging Copple and Mechem with mail fraud and tax evasion. Counts 1-16, 18-27, 29-32, and 34 charged Copple and Mechem with mail fraud of the funeral directors. Counts 17, 28, and 33 charged Copple and Mechem with mail fraud of individual investors.*fn4 Counts 35-37 charged Copple with income tax evasion for failing to file returns for 1986, 1987 and 1988.*fn5
After a trial lasting about a month, the jury found Copple guilty on all counts. On December 18, 1992, the district court sentenced Copple on the counts covered by the Sentencing Guidelines (the "Guidelines") to 71 months imprisonment, a $100,000 fine, and three years supervised release. He also ordered Copple to pay $4,257,940.45 in restitution to be made through the bankruptcy trustee. On the counts not covered by the Guidelines, the court sentenced Copple to five years imprisonment to be served concurrently with the Guidelines sentence. Copple has filed a timely appeal challenging both his conviction and sentence.
II. COPPLE'S CHALLENGES TO HIS CONVICTION
A. The 26 U.S.C. § 6103(h)(5) Claim
The first issue we address is Copple's claim that we should reverse his conviction because the requirements of § 6103(h)(5) were not met.*fn6 Section 6103(h)(5) provides in relevant part:
in connection with any judicial proceeding [related to tax administration] to which the United States is a party, the Secretary shall respond to a written inquiry from . . . any person (or his legal representative) who is a party to such proceeding as to whether an individual who is a prospective juror in such proceeding has or has not been the subject of any audit or other tax investigation by the Internal Revenue Service. The Secretary shall limit such response to an affirmative or negative reply to such an inquiry.
On July 27, 1992, about a month before jury selection, Copple moved pursuant to § 6103(h)(5) for disclosure of tax background information of prospective jurors. In its response to Copple's motion, the government agreed to provide the information, but stated that it would be virtually impossible to obtain tax audit information from prior to 1986. The district court granted Copple's motion for the § 6103(h)(5) investigation, but did not mention whether the IRS was to investigate the tax records of the prospective jurors for the years preceding 1986.
The government provided Copple with the IRS review indicating that none of the prospective jurors had been audited or investigated from 1986 to 1991, the years for which the IRS' records were computerized. At a hearing the day before commencement of trial, Copple claimed that he was entitled to the tax information without any limitation as to time period. The government responded that checking records of possible audits occurring before 1986 would require a manual search, which would take weeks, even a month, to complete.
Copple then claimed that he was entitled to ask on voir dire whether any of the prospective jurors had ever been audited by the IRS or whether any of the prospective jurors had ever been the subject of a civil or criminal tax investigation; he also argued that he was entitled to have the IRS verify the answers the jurors gave. The district court granted Copple's request for voir dire but declined to order the IRS to verify the jurors' answers.
On voir dire, the district court asked the prospective jurors: "Have you or any member of your immediate family ever been audited by the Internal Revenue Service?" In response to this question, Juror Number 7, Art Borczon stated that he had been audited during 1988 and 1989 (the audit for 1989 had not yet been resolved), that he had paid a deficiency, and that he had "never [been] satisfied with that." He also represented, however, that he could be a fair and impartial juror. Juror Number 45, James Henderson, also stated that he had been audited about 35 years earlier, but he too testified that ...