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United States v. Stern

decided: September 27, 1988.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
LOREN STERN AND FRANK PANNO, DEFENDANTS-APPELLANTS



1 Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 86 CR 329--Harry D. Leinenweber, Judge.

Wood, Jr., and Kanne, Circuit Judges and Reynolds,*fn* Senior District Judge.

Author: Kanne

KANNE, Circuit Judge.

Doris Fischer, a former stripper and one-time prostitute, began her association with Frank Stem, an entrepreneur and one-time lawyer, in 1979. Fischer met Stem when she began working at a Chicago nightclub of which he was part-owner. Although Fischer eventually left Stern's club, they did not lose contact and sometime in late 1980 or early 1981, Stern suggested to Fischer that they set up their own partnership and go into business. Stern recommended that they open a ar--a proposal rejected by Fischer. She did not drink and was dissatisfied with working in such surroundings. After some market research of her own, Fischer made a counter-proposal to Stern, suggesting they form a commercially advertised escort service. As Fischer explained to Stern, the escort service would, for a fee, provide clients with female 2 companionship, both sexual and platonic in nature. In short, Fischer proposed that they enter into a prostitution venture. Stern agreed.

Pursuant to that agreement, Stern provided Fischer with sufficient capital to begin her operations while Fischer retained managerial control of the business. Alter paying for expenses (including the escorts' fees) and her salary, Fischer and Stem evenly split the remaining profit. In addition to providing start-up capital, Stern also gave legal advice as to what the escorts could do and arranged for the installation of telephones and a call-forwarding service.

This new entry in the service market was first called "Chicago Continental," but shortly thereafter, in mid-1981, the business name was changed to "Fantasies Unlimited."*fn1 The escort service, based in a Chicago apartment, was advertised in two magazines, Welch and Nite Life, with a telephone number which potential clients were invited to call. When a client telephoned, an operator recorded the customer's name, address, business address and price quoted, which ranged from $125.00 to $200.00. If a check of the client information proved satisfactory, an escort was assigned and told where 3 to meet the client. This information, to which was added the particular method of sexual activity preferred by the client, the date on which services were performed, and the name of the escort assigned to the client, was placed on index cards and maintained in a file (later computerized).

Because Chicago had only one other advertised escort service, the business prospered, eventually employing from ten to twelve escorts. Begun in 1981, the business continued until 1986. The income for the escort service reached its peak in 1984, when Fischer recorded 4,720 transactions and receipts of $795,936.97.

In early 1981, Fischer was approached by Thomas Gervais who operated National Credit Service ("NCS"), an operation which made credit card usage available to businesses otherwise unable to obtain authorization to accept credit cards.*fn2 Gervais suggested that Fischer begin making credit card sales. When Fischer took the idea to Stern, he rejected it at first, but then reconsidered. A second meeting between Gervais and Fischer took place and soon thereafter customers were able to use their VISA, Master-Card or American Express cards 4 to pay for escort services.

After about six months, Fischer ran into some problems with NCS and American Express. Charges made on American Express cards were not billed by American Express but by NCS.*fn3 If NCS was unable to collect, it refused to make payment to Fischer, who nonetheless paid the escorts their percentage of the charge. Thus, Fantasies Unlimited began losing money on the American Express charges.

Stern was of the opinion that the NCS-American Express problem was costing the business too much uncollected revenue. He therefore offered Fischer the use of certain business accounts he owned, through which client charges could be billed. Using two accounts made available by Stem, Fischer's phone operators began calling the credit card companies for authorization codes before ac- cepting a charge. The procedure 5 used to obtain an authorization code involved a Fantasies Unlimited operator calling a "1-800" number and providing the operator on the other end with Stern's merchant code and the customer's credit card number.

Fantasies Unlimited escorts also carried portable printers allowing them to accept charges on the spot. At first, NCS provided Fischer with the slips for those charges but eventually, when the business began using Stern's accounts, Stern began providing slips. Fischer testified that after the slips were filled out, she returned the Master-Card and VISA slips to Stern and mailed the American Express slips to Arizona.*fn4

The business continued to grow with income increasing from $131,000.00 in 1981 to $583,317.25 in 1983. Stern continued to provide support, suggesting that escorts become independent contractors for tax purposes and laundering money for one escort through his business. Stern was also a Fantasies Unlimited patron, enjoying a courtesy discount.

In 1983, however, Frank Panno appeared on the scene. Although Fischer previously had met Panno during her days working 6 in clubs and occasionally had lunch with him, the two had no prior business dealings with each other. Once acquaintances had been renewed, Panno took Fischer to lunch and they met four other men, one of whom obviously was in charge. Panno had advised Fischer before the meeting to call the man in charge "sir." This unidentified man told Fischer that Stern would no longer be her partner and that Frank Panno would now see to her needs. Fischer pointed out that the telephone lines, so integral to her business, had all been installed under Stern's name. The unidentified man assured Fischer that Panno would take care of her and that he would see to it that her credit card service would continue.

Panno lived up to his end of the bargain and installed new telephone connections in a Chicago condominium owned by him.*fn5 This telephone hook-up forwarded calls either to the apartment of Fantasies Unlimited's manager or to Fischer's house. Telephone bills for that phone, sometimes in the thousands of dollars, were also sent to the condominium. Although no one used the condominium as a residence, it was thus integral to the successful operation of the prostitution business. For his efforts, Panno 7 received the share of profits previously reserved for Stern, who apparently was prudent enough to leave the business without protest.

Panno also suggested that Fischer begin advertising in the Indiana-Illinois Connection. Described by Fischer as a "sex magazine," this magazine was distributed, as the name indicates, in both Illinois and Indiana. Panno, who owned a massage parlor/adult bookstore and was part owner of a few bars, had done some advertising in the magazine himself and thought it might bring some additional business. Fischer also entrusted Panno with a little black book of Illinois-Indiana customers.*fn6

In August, 1984, operating difficulties appeared on the horizon. The FBI obtained search warrants for Fischer's residence and confiscated boxes of client cards and computerized files. Despite this fact, as indicated earlier, 1984 was the escort service's most successful year. In 1985, conditions 8 started to deteriorate, the IRS began investigating and the FBI searched her home, Panno's condominium, and certain safety deposit boxes. Finally, following the indictment by the grand jury in 1986, Fischer was forced to close down the prostitution operation.

THE INDICTMENT

Panno and Stern, along with five other defendants (in- cluding Fischer), were charged under 18 U.S.C. § 1962(d) with conspiring to violate 18 U.S.C. § 1962(c) which prohibits any person from being "employed by or associated with any enterprise engaged in, or the activities of which affect, interstate . . . commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collec- tion of unlawful debt." More specifically, Stern and Panno were charged with conspiring to conduct or participate in the affairs of the prostitution business, directly or indirectly, through a series of predicate offenses, which in this case involved causing Fischer to "use any facility in interstate commerce, . . . with intent to . . . promote, manage, establish, carry on . . . any unlawful activity . . ." in violation of 18 U.S.C. §§ 1952 and 2(b). 9 Put another way, Stern and Panno were charged with causing the use of an interstate facility--the telephone--with the intent to promote the prostitution business not only in violation of both 18 U.S.C. §§ 1952 and 2(b), but also in violation of § 1962(c) since those offenses constituted the RICO pattern of rack- eteering activity.

Panno alone was charged with filing false federal income tax returns, in violation of 26 U.S.C. § 7206(1).

Fischer pled guilty to three counts of the indictment and became the government's chief witness against several co-defendants, including her partners Loren Stern and Frank Panno.

Both Stern and Panno were convicted of all counts with which they were charged. Stem was sentenced to three years imprisonment plus five years probation, fined $40,000.00, and required to forfeit $108,870.50. Panno was sentenced to four years imprisonment and followed by five years ...


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