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United States v. Shah

United States District Court, D. Maryland

February 12, 2018




         The Court has before it the Government's Motion Regarding Intrinsic Evidence Alternatively as 404(b) Evidence [ECF No. 90], Defendant's Motion in Limine [ECF No. 96], and the materials submitted relating thereto. The parties have also raised additional evidentiary matters. The Court has held a motions hearing and pre-trial conference, has had the benefit of arguments by counsel, and will address all pending matters.

         I. Background

         Defendant Mahmood Shah was charged with six counts of Wire Fraud, in violation of 18 U.S.C. § 1343 [ECF No. 1]. On March 3, 2017, he pled guilty to one of the Counts before Judge Bennett [ECF No. 35], but moved to withdraw his guilty plea at sentencing. His motion was first denied and then granted upon reconsideration [ECF Nos. 60 and 75]. The case was transferred to the undersigned, and Defendant now faces a jury trial which will begin on February 12, 2018.

         Defendant Shah and his Co-Defendant, Muhammad Rafiq, were owners of Corner Grocery, a convenience store in Baltimore. Gov.'s Mot. at 3, ECF No. 90. The Government contends that starting in 2010, Shah and Rafiq engaged in a scheme to defraud the Supplemental Nutrition Assistance Program (“SNAP”), a program that uses federal tax dollars to subsidize “eligible food” for low-income households.[1]

         In Maryland, SNAP is administered using Electronic Benefits Transfer (“EBT”) cards, and retailers like Corner Grocery use a point of sale machine (“POS”) to access the benefits. Id. at 4. Beneficiaries use the EBT cards by swiping them through the retailer's POS machine, which allows the EBT system to authorize the transaction and then transfer the requested benefit to the retailer's bank account directly. Id. Before accepting SNAP benefits, retailers must submit an “FNS Form 252, Food Stamp Program Application for Stores” and certify that it is a violation to “trad[e] cash for Supplemental Nutrition Assistance Program benefits (i.e. trafficking).” Id. Shah signed this certification on December 10, 2009. Id.

         The Government alleges that starting in October 2010, Shah and his Co-Defendant defrauded SNAP of benefits “by unlawfully exchanging food stamps for cash, and in return charging the customer's EBT card double the amount.” Id. In a typical transaction, customers would approach Shah or Rafiq to “sell stamps” (i.e., redeem SNAP benefits for cash) and the Defendants would require the customer to buy a low cost item to mask the transaction. Id. Defendants would then swipe the customer's EBT card for the low cost item plus double the amount of cash the customer wanted. Id. at 5. The requested cash was given to the customer, and Shah and Rafiq would keep the remainder in their corporate bank account. Essentially, the Defendants allegedly “trad[ed] cash for SNAP benefits, and stole from the government the equivalent amount by charging a 100% fee to the customer's SNAP benefits.” Id. As a result, Defendants received “over $1.6 million in EBT deposits for food sales that never actually occurred or were substantially inflated.” Id.

         II. The Government's Motion Regarding Intrinsic Evidence Alternatively as 404(b) Evidence

         Shah will face trial for six counts of Wire Fraud. At trial, the Government intends to introduce undercover agent testimony, video and audio recordings of the defrauding transactions, and special agent testimony about Corner Grocery's EBT transactions. Id. at 5-6. The Government also intends to call FBI Analyst Johnson, who will testify about her “financial analysis of Corner Grocery.” Id. at 6-7. Among other things, this analysis will show that in order to have access the large amount of cash needed to perform these transactions, Defendants withdrew cash from their corporate account in an amount totaling approximately 50% of the value of the EBT transfers, which was then allegedly used to pay back customers. Id.

         As part of Johnson's testimony, the Government seeks to introduce Corner Grocery's corporate income tax returns for the years 2010 through 2016. Specifically, Ms. Johnson “will compare the Gross Receipts or Sales listed on those tax returns to the No. of total food stamp transactions in those years, ” “analyze the Corner Grocery company account . . . to determine the total No. of purchases of merchandise by Corner Grocery from third parties, ” and then “compare that No. to the Cost of Goods Sold listed on the tax returns.” Id. at 7. According to the Government, this will demonstrate that although Corner Grocery reported most or all of its food stamp transactions on its tax returns, it “vastly overstated its Cost of Goods sold.” Id. at 8. Instead of representing the actual cost of the merchandise on the shelf, the reported Cost of Goods Sold allegedly appears to be a combination of purchased merchandise combined with the cash given out to its customers for the fraudulent transactions. Id. This would have the effect of lowering the ordinary business income to the owners of the store on paper. Id.

         The Government contends that the tax returns are admissible as intrinsic evidence and 404(b) evidence. The Court will address each argument in turn.

         1. Tax Returns as Intrinsic Evidence

         Evidence of the Defendant's other bad acts will not be deemed inadmissible under 404(b) if it is “intrinsic” to the crime. United States v. Cooper, 482 F.3d 658, 663 (4th Cir. 2007) (“Rule 404(b) only applies . . . to evidence relating to acts extrinsic to the conduct being prosecuted.”). Evidence is intrinsic if it is part of the story of the crime or “served to complete the story” with respect to a particular charge. Id. (internal citations omitted). See also United States v. Lighty, 616 F.3d 321, 352 (4th Cir. 2010) (“acts are intrinsic when they are ‘inextricably intertwined or both acts are part of a single criminal episode or the other acts were necessary preliminaries to the crime charged.'”).

         The Government contends that the tax returns are admissible because they show how Defendant Shah and his Co-Defendant were able to account for gains attained through defrauding the SNAP program on their tax returns. Gov.'s Mot. at 8, ECF No. 90. Specifically, the contention is that the tax returns show how “the defendants classified these payouts as expenses and deducted them from the gross receipts taken in as SNAP benefits” in order to prevent themselves from having to pay taxes on the portions returned to customers. Id. Defendant argues that the tax returns are irrelevant and unnecessary for proving the six counts of wire fraud, because (1) the tax returns were prepared after the transactions, and (2) the food stamp income was declared for tax purposes. Def.'s Opp. at 1-3.

         The Court agrees with the Government that the alleged evidence is intrinsic to the charged crime. Defendant Shah has been charged with a financial crime (i.e., wire fraud), which naturally raises issues involving how the proceeds of that crime are accounted for on tax returns. He received SNAP benefits into his corporate account but then withdrew half of the money to return to customers. The Government is alleging that his tax returns are evidence of that exact transaction (i.e., Defendant purposely counting those withdrawals as Cost of Goods Sold on his tax returns so that he does not pay income on them, because he did not ultimately keep them).

         The Court does not find Defendant's argument about timing to be persuasive. Rule 404(b) does not specify that the “other acts” introduced must have pre-dated or be contemporaneous with the charged act. Rather, the inquiry here is whether the evidence completes the story or is inextricably intertwined with the charged crimes. Moreover, the fact that the proceeds were all reported on the tax return does not change the analysis. The evidence is not introduced to show tax fraud, but to show that Defendant made deliberate accounting decisions on his tax returns to cover up the scheme.

         Accordingly, the Court shall allow the introduction of the tax returns at issue as intrinsic to the crime charged. However, the Court finds that it is appropriate to include a jury instruction that the tax returns are not to be considered as evidence of tax fraud, but only as evidence relevant to the Defendant's actions in covering up the charged conduct or accounting for the charged conduct.

         2. Tax Returns as 404(b) Evidence

         “Although not admissible to prove the defendant's character, evidence of other wrongs may be admitted to prove ‘motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident.'” United States v. Lighty, 616 F.3d 321, 351-52 (4th Cir. 2010) (quoting Fed.R.Evid. 404(b)). For evidence to be admissible under 404(b), “it must be ‘(1) relevant to an issue other than the general character of the defendant; (2) necessary to prove an element of the charged offense; and (3) reliable.'” Id.

         The third requirement, i.e. reliability, “involves a Rule 403 determination, that is, the probative value of the evidence must not be substantially outweighed by its prejudicial effect.” Id. The Fourth Circuit has stated that the “possibly prejudicial effect of evidence can require exclusion only in those instances where the trial judge believes that there is a genuine risk that the emotions of the jury will be excited to irrational behavior.” Westfield Ins. Co. v. Harris, 134 F.3d 608, 614 (4th Cir. 1998) (quoting Morgan v. Foretich, 846 F.2d 941, 945 (4th Cir. 1988)). Finally, “Rule 404(b) is ‘an inclusive rule, admitting all evidence of other crimes or acts except that which tends to prove only criminal disposition.'” United States v. Basham, 561 F.3d 302, 326 (4th Cir. 2009).

         The Government argues that even if the evidence is not admissible as intrinsic to the crime charged, it is admissible in order to prove “intent, motive, knowledge, and lack of mistake or accident.” Gov.'s Mot. at 10, ECF No. 90. The Defendant argues that this is impermissible character evidence because “the permissible story to tell about the Defendant is over, after the crime.” Def.'s Opp. at 3, ECF No. 93.

         The Court is satisfied that the tax returns are also admissible under Fed.R.Evid. 404(b) and Lighty. First, it is relevant to the Defendant's intention and motive to defraud SNAP that he manipulated the Cost of Goods Sold expenses line in the tax returns in order to account for the cash that he had to pay back to his customers in the fraudulent EBT transaction. It is also relevant to Defendant's knowledge and lack of mistake as to the fraud scheme (i.e., it shows how Defendant affirmatively ensured he did not pay taxes on all of the SNAP benefits that went into his corporate account). It is necessary to explain whether there could be another reason for the cash withdrawals from the corporate bank account, and it is reliable because the Defendant signed the tax returns himself.

         Finally, the Court finds that there is no significant prejudice to Defendant that would substantially outweigh the probative value of this evidence. The evidence appears to be simple and relevant to the financial accounting of a financial fraud (and does not, for example, pose any risk of exciting the jury to emotion). For the same reasons stated above, the Court does not find Defendant's argument about timing to be persuasive. C.f. United States v. Matthews, 9 F.3d 1545 (4th Cir. ...

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