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UNITED STATES v. MCLAUGHLIN

December 22, 1995

UNITED STATES OF AMERICA
v.
RUSSELL McLAUGHLIN JR., MARK McLAUGHLIN, and ROBIN McLAUGHLIN, a/k/a "Alice McLaughlin Pavlo"



The opinion of the court was delivered by: DITTER

 DITTER, J.

 The defendants, who are siblings, are under indictment for conspiracy, tax evasion, and filing a false federal income tax return in connection with the 1988 return of Building Inspection Underwriters, Inc. ("BIU"), a company they and members of their family own. BIU performs building inspections for municipalities in Pennsylvania and New Jersey. The defendants filed several pretrial motions seeking dismissal of the indictment, suppression of evidence, and the striking of certain allegations from the indictment.

 
I. The Motion to Dismiss the Indictment Based on Government Misconduct.

 The defendants argue that "government misconduct" occurring during the investigation requires that I dismiss the charges against them. I should do so, they contend, either because the alleged misconduct violated the Constitution or pursuant to the federal courts' supervisory power. Dismissal of an indictment with prejudice is the "most severe sanction possible." United States v. Isgro, 974 F.2d 1091, 1097 (9th Cir. 1992), cert. denied, 507 U.S. 985, 123 L. Ed. 2d 148, 113 S. Ct. 1581 (1993). Among other things, it means that possibly guilty defendants will go unpunished. Therefore, it is appropriate only in narrow circumstances where the government engaged in serious misconduct and such misconduct prejudiced the defendants. See Bank of Nova Scotia v. United States, 487 U.S. 250, 254-55, 101 L. Ed. 2d 228, 108 S. Ct. 2369 (1988).

 The defendants contend that Robert W. White, an Internal Revenue Service ("IRS") special agent, engaged in misconduct when he violated several agency regulations and federal statutes during the investigation. In support of their motion, the defendants subpoenaed Special Agent White and IRS Agents Robert Tengood and William Fredericks. Before compelling that testimony, I required the defendants to produce some evidence that Special Agent White actually engaged in misconduct that prejudiced the defendants. I held six days of hearings during which 16 witnesses testified. Because I find no violation of the defendants' constitutional or statutory rights and that exercise of my supervisory power is unwarranted, I will deny their motion to dismiss the indictment and refuse the defendants' request to compel the IRS agents' testimony.

 A. The Alleged Misconduct.

 1. Violations of IRS policies and regulations.

 The defendants allege that the following acts and omissions by Special Agent White violated IRS regulations and policies. First, they contend that Special Agent White opened the investigation based on information obtained from the McLaughlins' business competitor, Gerald Azeff, who the defendants allege is also a friend of Special Agent White, and obtained information from Bernard McGuigan, the defendants' "sworn enemy." According to the defendants, that violated IRS policy prohibiting agents from having personal relationships with "informants" and is also unfair because information obtained from the defendants' enemy or competitor is unreliable.

 Second, the defendants allege that Special Agent White did not warn defendant Russell McLaughlin Jr. of his rights to counsel and to remain silent before three noncustodial interviews. The evidence at the hearing established that during the investigation, Special Agent White issued a summons demanding the production of, among other things, BIU corporate and financial records. Russell McLaughlin Jr. appeared as the corporate custodian of records, provided several boxes of documents, and answered Special Agent White's questions about them. That interview took place in Attorney Joseph P. Walheim, Esquire's office. The defendants claim that Walheim represented the defendants' father, Russell McLaughlin Sr., who was the sole target of the investigation at that time. On two other occasions, Russell McLaughlin Jr. provided documents to the IRS. While the record is, at best, unclear, I will assume for the purposes of this opinion that Russell McLaughlin Jr. was "interviewed" by Special Agent White when he provided documents on the two other occasions. According to the defendants, the failure to warn Russell McLaughlin Jr. violated IRS policy.

 Third, Special Agent White did not issue a receipt when Russell McLaughlin Jr. produced the BIU corporate and financial documents. Among other things, the IRS summons called for the production of records for a BIU account at the New Jersey National Bank. The indictment alleges that Russell McLaughlin Jr. failed to produce those records and that the account was used to conceal taxable funds received from BIU customers. That failure to issue the receipt violated IRS policy.

 Fourth, the defendants claim that Special Agent White attended a meeting with his "informant," Azeff, during which Special Agent White allowed Azeff to control the meeting and ask questions of those in attendance. The evidence at the hearing established that in March, 1989, Azeff held a meeting with a state and a local official which Special Agent White attended. Following the meeting, Azeff sent an anonymous letter to the Pennsylvania Attorney General's Office accusing Russell McLaughlin Jr. of extortion and improperly influencing a Newtown Township, Pennsylvania, official. According to the defendants, Special Agent White's conduct violated IRS policy requiring agents to control "informants" and prevent them from asking questions during witness interviews.

 Fifth, Special Agent White mailed to 77 municipalities IRS "circular letters" which requested financial information on some of the defendants' family businesses. Several of the recipients of the circular letters did not conduct business with the McLaughlins' companies and would, according to the defendants, possess no information relevant to the investigation of them. None of the letters, however, mentioned any of the defendants by name. According to the defendants, this violated IRS policy requiring agents to consider how subjects of investigations will be harmed or embarrassed by issuance of the circular letters.

 The defendants also contend that Special Agent White violated federal statutes and court rules. First, the defendants claim he disclosed confidential tax return and grand jury information about them. See 26 U.S.C. § 6103; Fed.R.Crim.P. 6(e)(2). The evidence at the hearing established only that McGuigan knew Azeff was Special Agent White's "informant," that an employee of Azeff concluded that the case against the defendants had been approved in Washington, D.C., and was "waiting to go to court," and that Michael Wilfing, a state of New Jersey employee, knew the identities of the targets of the IRS investigation. Each of those individuals denied that Special Agent White provided that information and the defendants produced no credible evidence that he was the source. Second, the defendants claim Special Agent White failed to investigate allegations that McGuigan made false statements in a mortgage loan application and failed to report to the IRS that Azeff altered one of the circular letters and mailed the altered version to some of the McLaughlin family companies' customers. See 26 U.S.C. § 7214(a)(8). At the hearing, the defendants failed to establish that Azeff altered the document or that Special Agent White knew that Azeff allegedly did so. Indeed, Attorney Walheim testified that he reported the incident to Special Agent White who assisted Walheim in attempting to determine who sent the altered circular letter. Finally, the defendants charge that Special Agent White obtained documents from the defendants' corporate accountant, Melvin Cherry, and their stockbroker, McLaughlin, Piven, and Vogel, without first issuing summonses. See 26 U.S.C. §§ 7602(a)(1), 7609(a).

 I will now consider the defendants' arguments that Special Agent White's conduct violated the Constitution or that dismissal of the indictment is warranted pursuant ...


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