United States v. Jonathan Davey

4th Cir.9/8/2016

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UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-4097

UNITED STATES OF AMERICA,

Plaintiff - Appellee,

v.

JONATHAN D. DAVEY,

Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad,
Jr., District Judge. (3:12-cr-00068-RJC-DSC-1)

Argued: May 12, 2016 Decided: September 8, 2016

Before TRAXLER and WYNN, Circuit Judges, and Norman K. MOON,
Senior United States District Judge for the Western District of
Virginia, sitting by designation.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Traxler and Senior Judge Moon joined.

ARGUED: Gary Alvin Bryant, WILLCOX & SAVAGE, PC, Norfolk,
Virginia, for Appellant. Anthony Joseph Enright, OFFICE OF THE
UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee.
ON BRIEF: Dianne K. Jones McVay, JONES MCVAY LAW FIRM, PLLC,
Dallas, Texas, for Appellant. Jill Westmoreland Rose, United
States Attorney, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

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WYNN, Circuit Judge:

Jonathan Davey (“Defendant”) appeals his jury convictions

for conspiracy to commit wire fraud, conspiracy to commit money

laundering, and tax evasion, as well as a related award of

restitution. Defendant contends that the district court erred

in excluding certain evidence, that there was insufficient

evidence supporting his conviction for tax evasion, and that

restitution was improperly calculated. We reject these

arguments, and affirm.

I.

A.

Evidence produced at trial revealed the following. In

2007, Defendant created a hedge fund named “Divine Circulation

Services” (“DCS”). Over the following two years, he solicited

millions of dollars in funds from numerous entities and private

individuals, and through DCS, he invested that money in four

different business ventures, each of which either failed or

turned out to be fraudulent.

By February 2009, one of the only DCS investments that was

purportedly still profitable was with a supposed hedge fund

called “Black Diamond,” which was later revealed to be a Ponzi

scheme. That month, Black Diamond’s founder, Keith Simmons, met

with Defendant and other hedge fund managers with investments in

Black Diamond and told them that a “cash out” was imminent. J.A.

3
146-48. In other words, said Simmons, Black Diamond soon would

be shut down, and all investor money would be returned. That

payout never happened. Indeed, soon after the meeting

announcing the supposed cash out, Black Diamond stopped honoring

withdrawal requests from its investors.

By the end of April 2009, Black Diamond was effectively

illiquid, the other DCS business ventures had collapsed, and

Defendant had stopped investing additional money in any

ventures, including Black Diamond. Nevertheless, Defendant

continued to solicit funds from new investors on the pretense

that their money actually would be invested. Along with other

hedge fund managers who had invested in Black Diamond, Defendant

set up a “cash” or “liquid” account in which to deposit these

new investor funds. J.A. 149. Instead of investing the money,

Defendant used it to fulfill withdrawal requests from old

investors, to pay himself a management fee, and to pay his own

personal expenses. In other words, Defendant set up his own

Ponzi scheme.

In addition to misrepresenting that DCS investors’ money

actually would be invested, Defendant made a number of other

false statements in order to obtain, or retain, investor funds.

For instance, Defendant told one large investor about a supposed

liquidity provider that did not exist, and he falsely suggested

4
to another investor that his organization had developed and was

using a successful currency trading software.

After the February 2009 meeting during which Simmons

announced the Black Diamond “cash out,” Defendant also helped

facilitate a broader Ponzi scheme involving numerous other hedge

fund managers who, like Defendant, used new investor money to

fund withdrawal requests and pay personal expenses. In return

for a monthly management fee, Defendant—through an entity called

“Safe Harbor”—served as a hedge fund administrator, handling

fund transfers to and from hedge fund cash accounts. In doing

so, Defendant contributed to an effort to falsely reassure

investors that their investments were sound by maintaining a

website accessible to investors that showed false, positive

monthly returns. DCS investors were among those with access to

this website, and the investors made additional investments in

reliance on the false information it conveyed. Defendant also

permitted the hedge fund managers to report that they had been

vetted by an “independent” accounting firm, i.e., Safe Harbor,

when that was not the case. J.A. 175-76.

One of the most significant personal expenses Defendant

funded with DCS investor money was the construction of a $2

million, 10,000-square-foot personal home. To channel money

from DCS towards the construction of his home, Defendant created

two additional entities: “Sovereign Grace” and “Shiloh Estates.”

5
Essentially, Defendant transferred funds, in the form of

purported “loans,” from DCS to Sovereign Grace, and then from

Sovereign Grace to Shiloh Estates, the legal owner of the home

and direct funder of its construction. J.A. 291-98, 513.

Those “loans” had no recognized interest rates, no payment

schedules, no associated liens, and no loan documentation. In

late 2008, Defendant informed Barry McFerren, his brother-in-law

and business associate, that he intended to default on the

loans, and Defendant did so in 2009. Defendant identified

$810,000 as a “loan” on his 2008 tax return, an amount

corresponding to purported loan payments to Shiloh Estates in

that year. J.A. 516-17.

Over time, without any truly profitable investments, the

money in DCS dried up. Near the end of August 2009, when DCS

had accumulated over $4 million in outstanding withdrawal

requests from investors, Defendant stopped accepting additional

investments. Through the fall of 2009, however, he continued to

use DCS money to pay personal expenses, and he continued to

accept fees from other hedge fund managers for publishing false

returns on Safe Harbor’s website. Outstanding withdrawal

requests from DCS investors grew to over $6 million by the end

of November 2009.

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B.

In February 2012, the government indicted Defendant and

three of the other hedge fund managers involved in the above

scheme on charges of conspiracy to commit securities fraud, 18

U.S.C. § 371, conspiracy to commit wire fraud, 18 U.S.C. § 1349,

and conspiracy to commit money laundering, 18 U.S.C. § 1956(h).

Additionally, Defendant was indicted for tax evasion, 26 U.S.C.

§ 7201. The other co-defendants pled guilty, but Defendant

elected to go to trial.

Over the course of a four-day trial, the government

presented testimony from over a dozen witnesses, including one

of the hedge fund managers who participated in the broader Ponzi

scheme, Defendant’s two principal employees, an IRS

investigator, and numerous individuals who invested money in

DCS. The defense presented testimony from five witnesses,

including Defendant and Simmons.

The jury returned a verdict of guilty on all four counts.

The district court sentenced Defendant to 252 months’

imprisonment. The court also found Defendant and his co-

conspirators jointly and severally liable for roughly $21.8

million in restitution. Defendant appealed, challenging the

restitution amount and all of his convictions except his

conviction for securities fraud.

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II.

Defendant first argues that the trial court committed

reversible error with regard to multiple evidentiary rulings.

In particular, Defendant contends that the district court should

not have excluded: (1) testimony from certain investors

Defendant turned away in the fall of 2009, (2) evidence

regarding certain non-fraudulent investments made by DCS, and

(3) evidence that Defendant eventually paid taxes on the amount

he designated as a “loan” on his 2008 tax return.

We review a district court’s evidentiary rulings for abuse

of discretion. United States v. Reevey, 364 F.3d 151, 156 (4th

Cir. 2004). Moreover, such rulings are subject to a harmless-

error standard, meaning that we will affirm notwithstanding an

error if it is “‘highly probable that the error did not affect

the judgment.’” United States v. Ibisevic, 675 F.3d 342, 349–50

(4th Cir. 2012) (quoting United States v. Madden, 38 F.3d 747,

753 (4th Cir. 1994)).

A.

Defendant contends that the district court erred when it

excluded the testimony of certain witnesses who would have

testified that Defendant refused to accept their money as an

investment in DCS after August 2009. He argues that such

testimony was relevant to his state of mind, in that it would

have suggested that Defendant took investor money not to

8
facilitate a Ponzi scheme, but rather because, through much of

2009, he believed Black Diamond was legitimate and that a cash

out was imminent.

Assuming without deciding that the district court abused

its discretion in excluding this evidence, any such error was

harmless. The “‘single most important factor’” in a harmless-

error inquiry is the closeness of the case. United States v.

Ince, 21 F.3d 576, 584 (4th Cir. 1994) (quoting United States v.

Urbanik, 801 F.2d 692, 699 (4th Cir. 1986)).

Here, as outlined above, the government introduced at trial

overwhelming evidence that Defendant and his co-conspirators

solicited funds by intentionally misleading investors, in

multiple ways. Even though Black Diamond had stopped fulfilling

withdrawal requests and Defendant had stopped investing

additional money in Black Diamond by the end of April 2009,

Defendant continued to solicit investor money for several more

months, falsely representing that he would invest it. That is

not to mention other, more particularized false assertions

Defendant made to investors—for example, about a non-existent

liquidity provider.

Moreover, it was undisputed at trial that Defendant did

eventually stop accepting new investments. The accounting

records for DCS were introduced at trial, and Defendant

testified in detail regarding the investors he refused after

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August 2009. Indeed, defense counsel incorporated Defendant’s

turning away of investors into his closing argument. The

government also accepted that fact as true—before explaining why

it was not dispositive—during its closing.

In short, even if the trial court erred in excluding the

testimony of turned-away investors, it is “‘highly probable that

the error did not affect the judgment.’” Ibisevic, 675 F.3d at

350 (quoting Madden, 38 F.3d at 753).

B.

Defendant further argues that the district court abused its

discretion in excluding as cumulative or irrelevant certain

evidence related to investments made by DCS other than Black

Diamond. In particular, Defendant contends that the district

court should have admitted evidence that funds DCS invested in

“Amkel”—a separate venture that also turned out to be a fraud,

though not one perpetrated by Defendant—had been frozen in

connection with a government investigation, and ultimately

recovered. According to Defendant, this evidence would have

shown that DCS was a legitimate investment vehicle with real

value. Further, Defendant argues that the district court should

have permitted the principal of another failed DCS investment—a

movie production company called “Audience Alliance”—to play a

movie trailer and testify that he intended to repay the loan DCS

10
issued to the company. This evidence, too, was offered to show

that DCS was not wholly fraudulent.

The district court did not abuse its discretion in

concluding that the potential probative value of the Amkel and

Audience Alliance evidence was “substantially outweighed by a

danger of . . . confusing the issues, misleading the jury, undue

delay, wasting time, or needlessly presenting cumulative

evidence.” Fed. R. Evid. 403.

First, we fail to see how evidence that DCS eventually

recovered frozen funds from a different fraudulent venture is

probative of Defendant’s lack of intent to defraud his

investors. And, as the district court reasonably concluded,

such evidence could very well confuse a jury.

Second, it may be that evidence showing DCS invested

partially in Audience Alliance—which, though unsuccessful, was

not fraudulent—is relevant regarding Defendant’s intent to

defraud. However, numerous witnesses, including Defendant,

testified as to the existence and nature of the Audience

Alliance investment. The district court was therefore within

its discretion to exclude further evidence of the Audience

Alliance investment’s legitimacy—including testimony from

11
Audience Alliance’s principal that he intended to repay his

debts one day—as cumulative. *

C.

Defendant’s final argument contesting an evidentiary ruling

relates to his conviction for tax evasion. At trial, the

government sought to show that Defendant evaded taxes by falsely

characterizing $810,000 in payments from Sovereign Grace to

Shiloh Estates—the entity that funded the construction of his

home—as a “loan” on his 2008 tax return. Defendant contends the

district court erred by excluding his 2009 tax return, which

reported the defaulted “loan” as taxable income in 2009. He

argues that this evidence tends to disprove his intent to evade

taxes in 2008.

The government’s theory of the case, however, was that

Defendant mischaracterized the payment as a loan in 2008, and

that this mischaracterization was itself a willful attempt to

evade income taxes. Consequently, the relevant intent was

Defendant’s intent to repay—or not repay—the loan amount at the

time he received it. See United States v. Pomponio, 563 F.2d

659, 662–63 (4th Cir. 1977) (explaining that the “principal

*
To the extent that the district court excluded testimony
from the Audience Alliance principal regarding his intent to
repay his debt in the future on the grounds of relevance, we
likewise consider that ruling to have been a proper exercise of
the court’s discretion.

12
question” relevant to a tax evasion prosecution based on

mischaracterized loan payments is whether those payments “were

not [actually] loans, that is, that no intent to repay them

existed, and that the defendants knew they were not loans”).

That one year later Defendant defaulted on the loan, recognized

it as income, and paid taxes on it tends to reinforce, rather

than undermine, the government’s argument that Defendant did not

intend to repay the “loan” when he received it.

In short, the district court did not abuse its discretion

in excluding the 2009 tax return for lack of relevance.

III.

In addition to challenging evidentiary rulings, Defendant

challenges his tax evasion conviction on grounds that it was not

supported by sufficient evidence, and that the district court

therefore erred in denying his motion for judgment of acquittal

for that count under Rule 29 of the Federal Rules of Criminal

Procedure. [See Appellant’s Br. at 35–39]

This Court will uphold a guilty verdict “if, viewing the

evidence in the light most favorable to the Government, it is

supported by ‘substantial evidence.’” United States v. Alerre,

430 F.3d 681, 693 (4th Cir. 2005) (quoting United States v.

Burgos, 94 F.3d 849, 862 (4th Cir. 1996) (en banc)).

“[S]ubstantial evidence is evidence that a reasonable finder of

fact could accept as adequate and sufficient to support a

13
conclusion of a defendant’s guilt beyond a reasonable doubt.”

Burgos, 94 F.3d at 862. In other words, the relevant question

is whether “any rational trier of fact could have found the

essential elements of the crime beyond a reasonable doubt.”

Jackson v. Virginia, 443 U.S. 307, 319 (1979).

The relevant criminal provision, 26 U.S.C. § 7201, makes it

a felony to “willfully attempt[] in any manner to evade or

defeat any tax imposed by [the Internal Revenue Code].” To

establish Section 7201 tax evasion, the government must show “1)

that the defendant acted willfully; 2) that the defendant

committed an affirmative act that constituted an attempted

evasion of tax payments; and 3) that a substantial tax

deficiency existed.” United States v. Wilson, 118 F.3d 228, 236

(4th Cir. 1997); see also Sansone v. United States, 380 U.S.

343, 351 (1965). “The jury may infer a ‘willful attempt’ from

‘any conduct having the likely effect of misleading or

concealing.’” Wilson, 118 F.3d at 236 (quoting United States v.

Goodyear, 649 F.2d 226, 228 (4th Cir. 1981)).

Here, as discussed above, the government theorized that

Defendant falsely characterized the $810,000 he transferred from

Sovereign Grace to Shiloh Estates as a loan on his 2008 tax

return in order to avoid paying taxes on that amount in that

year. It is settled law that what defines a true loan is “the

taxpayer’s own intention to repay” the loan amount. Pomponio,

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563 F.2d at 662; see also Comm’r of Internal Revenue v. Tufts,

461 U.S. 300, 307 (1983) (“When a taxpayer receives a loan, he

incurs an obligation to repay that loan at some future date.

Because of this obligation, the loan proceeds do not qualify as

income to the taxpayer.”); United States v. Beavers, 756 F.3d

1044, 1057 (7th Cir. 2014) (explaining that “loan proceeds are

not income because the taxpayer has incurred a genuine

obligation to repay the loan” and that “the recipient must

actually intend to repay” for a transaction to qualify as a

loan).

Defendant does not dispute that he characterized the

$810,000 transfer as a loan on his 2008 tax return or that there

was a resulting tax deficiency in that year. Consequently, the

relevant legal question is whether Defendant’s characterization

of the transfer as a loan on his tax return was accurate, i.e.,

“whether the evidence was sufficient for the jury to have found

beyond a reasonable doubt that the [transfer was] not [a]

loan[], that is, that no intent to repay [it] existed.”

Pomponio, 563 F.2d at 662–63.

In answering that question, both direct evidence of intent

and circumstantial evidence regarding the nature of the

transaction are relevant. See id. at 663 (finding sufficient

evidence that various advances were not loans where there was no

fixed repayment date, no notes evidencing the debt, no security

15
backing it, and no interest charged or paid on the amount); see

also Merck & Co. v. United States, 652 F.3d 475, 481 (3d Cir.

2011) (“[D]etermining whether a transaction qualifies as a loan

requires analysis both of the objective characteristics of the

transaction and of the parties’ intentions.”).

The government introduced direct and circumstantial

evidence that Defendant did not intend to repay the $810,000

transfer when he received it, and therefore that the transaction

was taxable income, rather than a loan. Barry McFerren,

Defendant’s brother-in-law and employee, testified that in the

fall of 2008 Defendant said that he intended from the beginning

to default on the purported loan, i.e., not to repay it.

Defendant did in fact default on the purported loan in December

2009. Lynn Wymer, Defendant’s accountant, testified that, to

her knowledge, there was no interest rate governing the

purported loan, no loan document, no repayment schedule, no loan

payments made, and no lien securing it. Tyiesha Nixon, an IRS

investigator, similarly testified that, after examining

Defendant’s tax returns, accounting records, and other related

financial documents, she found no loan documents, nothing

indicating an interest rate on the purported loan, no schedule

of payments, and no lien securing it.

In short, there was sufficient evidence that Defendant

falsely characterized the $810,000 transfer as a loan on his

16
2008 tax return. Because jurors “may infer a ‘willful attempt’

from ‘any conduct having the likely effect of misleading or

concealing,’” Wilson, 118 F.3d at 236 (quoting Goodyear, 649

F.2d at 228), there also was sufficient evidence that Defendant

attempted to evade the payment of taxes in 2008. We therefore

affirm the district court’s denial of Defendant’s motion for

acquittal on the tax evasion count.

IV.

Finally, Defendant challenges the district court’s

restitution order, primarily on the ground that his convictions

for conspiracy to commit wire fraud and money laundering are

invalid. Because we affirm those convictions, that argument

fails. Defendant also suggests that the district court

neglected to consider amounts already available to victims from

other sources, such as the funds recovered from the fraudulent

Amkel investment. The record, however, contradicts that

argument. In particular, the district court clarified that

“[t]o the extent that there are funds available to offset the

total amount of restitution, those will be applied in the

restitution process.” J.A. 997–98. Furthermore, the judgment

expressly limits “victims’ recovery . . . to the amount of their

loss,” so that Defendant’s “liability for restitution [will]

cease[] if and when the victim(s) receive full restitution.”

J.A. 1075.

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We therefore reject Defendant’s challenge to the

restitution order.

V.

For the reasons stated above, we affirm the challenged

convictions and the restitution order.

AFFIRMED

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United States v. Jonathan Davey

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