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Split 7th Circuit affirms convictions in $450,000 fraudulent investment scheme

August 29, 2017

A divided 7th Circuit Court of Appeals has affirmed 20 fraud-related convictions against a man accused of running a fraudulent investment scheme that resulted in a nearly $300,000 in restitution, finding that though the district court did err during trial, those errors did not warrant a new trial.

In 2009, Jaime Lopez began soliciting startup capital to create financial investment business entities known as JCL Interest Plus, JCL Capital Inc., JCL & Company and JCL Direct. During the period between December 2009 and January 2011, Thomas Holsworth, Jerry and Colleen Wilson and Danny Cole gave Lopez a total of $450,000 for his startups.

Lopez instructed his four investors to transfer their retirement funds into self-directed individual retirement accounts administered by Midland IRA. They also executed promissory notes, and Lopez told them he would secure their returns through investments in companies such as Coca-Cola, Wells Fargo and Visa.

However, when Lopez deposited the funds into the various JCL bank accounts, he did not invest any of it in the advertised companies. Instead, he lost Cole’s money in a failed stock-trading account and used much of the remaining funds to pay for his personal expenses.

Lopez then made the decision to change the terms of each of the investor’s promissory notes without their permission, making the term longer and the rate of return lower. Cole eventually complained to the Indiana Secretary of State Securities Division, which led to an IRS investigation and Lopez’s conviction of 15 counts of wire fraud, four counts of money laundering and one count of securities fraud.

Lopez then appealed in United States of America v. Jaime C. Lopez, 16-2269, arguing he deserved a new trial. Specifically, Lopez claimed the Southern District court erred by allowing IRS Agent Jane DeLancey to use the phrase “lulling payments” to refer to money Lopez periodically paid back to the investors under the guise that they were derived from investment interest.

That phrase allowed DeLancey to express opinions about Lopez’s intent that fell outside the permissible scope of a summary witness testimony, Lopez said. However, Judge William Bauer of the 7th Circuit Court of Appeals wrote in the majority opinion DeLancey never offered an opinion as to why Lopez made the payments, but instead used the phrase to describe payments that were not derived from interest on investments, as Lopez claimed.

Lopez also took issue with references the government made, over his objection, to Bernie Madoff during its closing argument, when the government indicated Madoff’s victims had also received “lulling payments.” But Bauer said the references to Madoff did not constitute reversible error because the prosecutor did not draw a direct comparison, misstate the evidence or implicate one of Lopez’s specific trial rights. Further, there was significant evidence of Lopez’s guilt, so the references to Madoff did not deny him a fair trial.

The majority also affirmed the decision to prohibit Lopez from referring to his witness, Michael Alerding, a certified public accountant, as an expert under the standards in Federal Rules of Evidence 702, but instead to view his testimony as opinion testimony. Using the word “expert” can cause juries to give too much weight to a witness’ testimony, Bauer wrote, so the court properly instructed the jury to judge Alerding’s testimony with the same weight as any other witness’s.

However, the majority held the district court erred when it declined to let Lopez introduce extrinsic evidence of a prior inconsistent statement to impeach Cole as a government witness. Cole had previously told an IRS agent that the signature on his initial investment document was not his own, but then admitted on the stand he failed to tell the agent he had given Lopez permission to sign Cole’s name for him.

The district court declined to allow extrinsic evidence to perfect the impeachment, but such error was harmless because the inconsistencies in Cole’s statement were not central to Lopez’s defense, Bauer said. Thus, the 7th Circuit denied Lopez’s request for a new trial.

However, in a dissenting opinion, Judge Richard Posner said Cole’s omission of a “crucial detail” suggests he may have intentionally misled the government into thinking Lopez’s crimes were more serious than in reality. Further, Posner said court muddled Rule 702 standards when it prohibited Lopez from calling Alerding an expert and prohibited him from discussing typical small businesses.

Conversely, Posner wrote DeLancey, as a lay summary witness, should not have been permitted to use the phrase “lulling payments” because it was opinion testimony. But the worst mistake came with the admission of the Madoff comparisons, statements Posner said were “like comparing Judge (Tanya Walton) Pratt to Pontius Pilate.”

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