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United States v. Coveney

decided as corrected.: July 6, 1993.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
JOSEPH T. COVENEY AND FRANCIS M. COVENEY, DEFENDANTS-APPELLANTS.



Appeals from the United States District Court for the Southern District of Texas. D.C. DOCKET NUMBER CR-H-91-53-S. JUDGE Samuel B. Kent. {Counsel}{Q}Counsel{/Q}{/Counsel}

FOR JOSEPH COVENEY: Alexander Bunin, AFPD, 55 Waugh Drive, Suite 900, Houston, TX 77007 (713/880-9900). FOR FRANCIS COVENEY: Roland E. Dahlin, II, FPD, David B. Gerger, AFPD, 440 Louisiana St., Ste. 310, Houston, TX 77002-1634, FTS(359-9600), P.O. Box 61508, (77208-1508). Daniel Wannamaker, AFPD, 55 Waugh Dr., Ste. 900, Houston, TX 77007 (713/880-9900).

For Plaintiff-Appellee: Ronald G. Woods, U.S. Atty., Paula C. Offenhauser, AUSA, Jeffrey A. Babcock, AUSA, 515 Rusk Ave., Suite 3000, Houston, TX 77002, FTS(526-4712). Cynthia A. Young, DOJ, 10th & Pennsylvania Ave., N.W., Washington, D.C. 20530 (202/514-4272).

Before Politz, Chief Judge, Reavley, and Barksdale, Circuit Judges.

Author: Barksdale

BARKSDALE, Circuit Judge:

This tax fraud appeal turns on a fairly routine, straight-forward and simple issue, sufficiency of the evidence; but, it is complicated greatly by the Government's failure to carry the day on its global theory for conviction, by the concomitant difficulty of instead reviewing its proof on a count-by-count basis, and by the incomplete state of the record on appeal, due to the Government's failure to include the exhibits. Also in issue is the possible prejudice suffered by Joseph and Francis Coveney when the Government called two of their former attorneys to testify, one invoking the attorney-client privilege 20 times. Each of the Coveneys was convicted of aiding and assisting in the preparation of 29 false income tax returns, and conspiracy to commit those offenses. Finding the evidence on conspiracy and 16 of the aiding and assisting counts sufficient, and no reversible error arising out of the attorneys' testimony, we AFFIRM on those counts. However, because the evidence, as contained in the incomplete record on appeal, is insufficient for 13 of the aiding and assisting counts, we REVERSE those convictions, and REMAND for resentencing.

I.

In 1983, brothers Francis and Joseph Coveney formed Temperature Technology, Inc. (TTI), a Houston-based company which installed energy management systems (EMS) in commercial buildings. (An EMS is an energy control unit which is connected to an item of equipment and is designed to reduce energy use by causing the item to cycle on and off.) TTI became a recommended installation company for the OEC Leasing Corporation (OEC), as part of its promotion of a tax shelter program. OEC purchased EMS units from Franklin New Energy Corporation (FNEC). (The EMS was driven by a microprocessing panel manufactured by Eckard Engineering.) OEC leased the EMS units to investors, who in turn contracted with an installation company to install and service the systems. The installation company was responsible for locating an "end-user" for each system -- a commercial building where the unit would be installed. If the EMS saved energy costs, those savings would be shared by the end-user, the investor, and the installation company.*fn1 In addition to these shared savings, the installation company received an installation fee from the investor, the end-user reaped the benefits from a unit it was not required to purchase or maintain, and the investor was entitled on his income tax return to an investment tax credit and deductions for, among other things, depreciation and installation.

Almost immediately, TTI began to experience technical problems with the OEC units, which were apparently caused by the FNEC/Eckard microprocessors. TTI attempted to correct the problem, and, in May, hired John Millar as national service manager. Millar's technical staff made a number of changes in the microprocessing chips and eventually resolved the problem.

At approximately the same time, Francis Coveney directed Millar to begin developing a solar-powered EMS. Millar immediately developed a prototype using the FNEC/Eckard unit. Also working with a National Enco brand EMS, which he considered superior, he converted the National Enco eight and 16-channel units to solar power, but was unable to do so with the 24-channel unit.*fn2 This 24-channel unit had a remote monitoring capability, which allowed the unit to be accessed and programmed through telephone lines. Without such remote monitoring, the unit must be serviced on site. Although the eight and 16-channel National Enco units did not have remote monitoring, the FNEC/Eckard units did. But, Millar was never able to convert those units to solar power while maintaining the remote monitoring feature.

Francis Coveney had directed development of a solar-powered EMS with an eye toward a new venture. In August 1984, he formed Enersolex, a San Antonio-based company which marketed a tax shelter similar to that offered by OEC. In the Enersolex program, however, investors purchased, rather than leased, their EMS units, and the units were to be solar, rather than electrically, powered. There was no added benefit for the installation company or the end-user; but, because the unit was solar powered, the investor was entitled to a 15% energy tax credit, in addition to the investment tax credit and deductions available to an OEC investor.

While Millar was still developing the prototypes, financial planners expressed an interest in marketing the solar-powered EMS. TTI retained Raymond Merry, an energy consultant, to analyze the feasibility of such a system.*fn3 He prepared a report on the capabilities of the proposed EMS, but noted carefully that it had not yet been assembled. And, Enersolex retained Craig Welscher, an attorney, to prepare a tax opinion on the proposed solar unit. Moreover, Francis Coveney retained CPA John Pearl to prepare an analysis of the estimated tax write-off and cash benefits of the Enersolex system. The documents became part of the Enersolex promotional package, which was distributed to financial planners. A videotape featuring the National Enco prototype was prepared, as well as a slideshow featuring the FNEC/Eckard model. Representatives of both Enersolex and TTI visited a number of cities, promoting and demonstrating the solar-powered EMS. TTI, still installing and servicing OEC units, was also a recommended installation company for the new Enersolex program.

Meanwhile, a New Jersey-based Internal Revenue Service task force, investigating potentially abusive tax shelters, had heard of the Enersolex promotion. In October 1984, two IRS agents travelled to San Antonio and met with Francis Coveney, his attorney, accountant, and the Enersolex marketing director. Francis Coveney demonstrated the Enersolex unit and asked whether he should continue to sell it. The agents explained that they were not then in a position to answer that question, but would advise him if they determined that the tax shelter was abusive. The investigation was transferred to Texas before that determination was made.

By the end of 1984, approximately 115 Enersolex units had been sold, most in the last two weeks of December.*fn4 A majority of the Enersolex investors selected TTI as their installation company. Each investor received a letter from Joseph Coveney, thanking them for selecting TTI and telling them that information about their end-user location would be forthcoming. A second letter told them when and where their unit had been installed; most included photographs of the unit and/or the end-user site.

Although TTI had represented that it had secured numerous end-user locations for the Enersolex units, this was apparently not the case. Because most investors intended to file their income tax returns on April 15, see infra at 7 and note 20, the pressure was on to install these units in the first few months of 1985. By letter in February 1985, TTI informed OEC investors for whom it was an installer that it would no longer service units through the OEC program, explaining that it was becoming increasingly difficult to obtain parts for repair and maintenance of those units. Therefore, the units would be removed, and each OEC investor was to inform TTI where his unit should be sent. Within days of that notice to OEC investors, Enersolex investors began to receive letters from TTI about their end-user sites. Many of the Enersolex units were installed in the same locations from which OEC units had been removed. There was extensive testimony at trial regarding specific locations. In some cases, the OEC unit was physically removed, and an Enersolex unit installed in its place. In most cases, however, the OEC unit was simply converted to solar power.*fn5 Among other things, internal wiring was changed, and the unit was connected to solar panels which were installed on the roof. The brown OEC units were painted blue and an Enersolex sticker added. Each Enersolex investor was notified of his unit's installation; and, on their 1984 tax returns, most claimed a 15% energy tax credit, a 10% investment tax credit, and deductions for depreciation and installation (tax benefits).

Picking up on the earlier investigation, IRS agents in Texas met with representatives of Enersolex, including Francis and Joseph Coveney, on April 3 and 22, 1985. That July, they referred the case to the Criminal Investigation Division of the IRS. First indicted in April 1991, Francis and Joseph Coveney, Enersolex accountant John Pearl, and Gerald Ramsey, TTI's vice-president of operations, were charged in a superseding indictment in October 1991 with conspiracy to aid and assist in the preparation of false income tax returns (count 1). Pearl and the Coveneys were also charged in 30 counts with aiding and assisting in the preparation of false income tax returns (counts 2-31). And, Ramsey was charged in two additional substantive counts (counts 32 and 33).

In presenting its evidence, the Government called two of the defendants' former attorneys as witnesses, as discussed in part II.A. The defendants unsuccessfully moved for a mistrial, premised on the repeated invocation of the attorney-client privilege. Their motions for judgments of acquittal upon the completion of the Government's case-in-chief were taken under advisement, re-urged at the close of all the evidence, and ultimately denied.

Before the case went to the jury, the Government dismissed one substantive count against the Coveneys and Pearl (count 4). Francis and Joseph Coveney were each found guilty on the conspiracy count and the remaining 29 substantive counts against them; Pearl was acquitted; and Ramsey was found guilty of conspiracy, but acquitted on his two substantive counts. On the conspiracy count, Francis Coveney was fined $3,500 and Joseph Coveney, $2,750; and each was sentenced to 30 concurrent prison terms -- Francis Coveney's being 18 months each, and Joseph Coveney's, 16 months each. Only the Coveneys are before us on appeal.

II.

The Coveneys challenge the denial of a mistrial and the sufficiency of the evidence.*fn6

A.

The grant or denial of a mistrial is, of course, a matter left to the discretion of the district court. We review only for abuse of that discretion, United States v. Burke , 496 F.2d 373 (5th Cir.), cert. denied, 419 U.S. 966, 42 L. Ed. 2d 182, 95 S. Ct. 229 (1974), and, as explained below, find none here.

After the Government subpoenaed three of the defendants' former attorneys to testify, the defendants moved to quash, asserting the attorney-client privilege. The district court denied the motions, but conducted a voir dire of the witnesses to establish the acceptable boundaries for their testimony. Two of the three, Robert Fee and Craig Welscher, were called to testify.

Fee was called as the Government's first witness. After he twice invoked the attorney-client privilege, the defendants moved for a mistrial. The motion was denied, but the jury was given a limiting instruction.*fn7 When Fee invoked the privilege a third time, the defendants unsuccessfully re-urged their motion.

After a three-day weekend, the trial resumed; and Welscher was called as the third witness that day. During his testimony, the attorney-client privilege was invoked 20 times, either by him or one of the defendants.*fn8

The Coveneys contend that the Government knew Fee and Welscher would assert the attorney-client privilege, and committed reversible error by calling them to testify. They maintain that continued invocation of the privilege, highlighted by the district court's "ineffective" limiting instructions,*fn9 cast suspicion on them and caused the jury to believe that they were "keeping secrets".

Both the Supreme Court, see Namet v. United States , 373 U.S. 179, 10 L. Ed. 2d 278, 83 S. Ct. 1151 (1963), and our court, see San Fratello v. United States , 340 F.2d 560 (5th Cir. 1965), have recognized that forced invocation of a testimonial privilege might, in some cases, so prejudice the defendant as to warrant reversal. Having ...


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