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United States of America v. Fernando Benalcazar and Israel Michael Zygman

September 29, 2011

UNITED STATES OF AMERICA
v.
FERNANDO BENALCAZAR AND ISRAEL MICHAEL ZYGMAN



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

On February 17, 2011, a jury convicted defendants Fernando Benalcazar ("Benalcazar") and Israel Michael Zygman ("Zygman") of participating in a tax fraud conspiracy. Benalcazar was found guilty of conspiracy (Count 1), wire fraud (Count 5), and mail fraud (Counts 22, 33, and 34), and Zygman of conspiracy (Count 1) and mail fraud (Counts 42-44). Benalcazar moves only for a new trial under Federal Rule of Criminal Procedure 33 and Zygman moves for both a new trial and a judgment of acquittal. For the following reasons, the Court denies Benalcazar's Motion for a New Trial and Zygman's Motions for Judgment of Acquittal or a New Trial.

BACKGROUND

I. Overview of Scheme

Marvin Berkowitz ("Berkowitz") created and led a conspiracy to submit over 4,000 fraudulent federal and state tax returns. (R. 16, Superseding Indictment ¶ 3.) Berkowitz and his coconspirators filed tax returns that claimed over $26 million in IRS refunds and $17.8 million in state refunds. (Id.) The IRS actually issued over $2.2 million in refunds and various state departments of revenue issued over $2.8 million in refunds. (Id.)

Specifically, various defendants prepared over 3,500 false federal income tax forms and 500 false state returns. (Id. ¶ 4.) These returns were filed based on the names and social security numbers of federal inmates and deceased individuals and included fictitious deductions, credits, and income. (Id.) The defendants arranged for the returns to be mailed to numerous addresses or directly deposited to bank accounts that members of the conspiracy controlled. (Id.¶ 6.) Defendants then transferred the refund checks through banks and currency exchanges and split up the proceeds among themselves. (Id.) Berkowitz and the other principal participants in the conspiracy pled guilty and two coconspirators, Benalcazar and Zygman, went to trial. Within the broader scheme, Benalcazar and Zygman were responsible for receiving and depositing refund checks through personal or corporate bank accounts and distributing the proceeds to Berkowitz, members of his family, and other participants in the conspiracy. (Id. ¶¶ 16, 22.)

II. Trial Testimony

Only Zygman challenges the sufficiency of the evidence against him at trial through a Rule 29 Judgment of Acquittal; Benalcazar's Motion for a New Trial depends on specific evidentiary and legal issues, not the factual adequacy of the evidence at trial. The Court will therefore primarily focus on the trial testimony concerning Zygman's role in the scheme.

A. Israel Michael Zygman

Berkowitz filed thousands of fictitious IRS and state tax returns falsely claiming refunds using the names and social security numbers of federal prisoners and deceased individuals. (Trial Tr. 562:2-4.) As part of the scheme Berkowitz arranged for some of the refund checks of certain prisoners to be mailed to North 23rd Street, McAllen, Texas, which was the address of Zygman's tailor shop; the parties stipulated to his fact. (Tr. 2124:15-2125:7) Government Exhibit Hatagan 1 also catalogued the numerous IRS and state tax claims that listed this address as the location to send the refund checks. Upon receiving the refund checks, Zygman forwarded them to Berkowitz, who was living in Israel at the time. (Tr. 2005:9-18; 2006:10-20.)

As IRS agent Gerald Hatagan testified, Zygman also deposited refund checks primarily into three personal bank accounts: two from Alamo Bank of Texas, one ending in account number 6767 and the other ending in 1948; the third account was with Frost National Bank and ended in account number 1807. (Tr. 2018: 3-16.) Agent Hatagan reviewed the deposits going into these accounts and the disbursements going out. (Tr. 2018:17-2019:3.)

The 6767 Alamo Bank of Texas account was opened on November 8, 2004 and the first refund check was deposited into it on November 12. (Tr. 2020:2-4; 2024:17-20.) The checks that Zygman deposited into the account were not payable to him. (Tr. 2024:21-2025:1.) For example, from January 30, 2006 to March 13, 2006, Zygman deposited three checks that were all issued to a federal prisoner, Dwayne E. Jones, from Indiana, Iowa, and New Jersey departments of revenue. (Tr. 2032:1-2033:15.) From November 2004 until the last deposit into the Alamo 6767 account in April 2006, Zygman made deposits into the account totaling $111,571.05. (Tr. 2035:5-13.) Of this amount, $101,996.84 was from IRS and state refund checks issued to third parties. (Tr. 2035:10-13.)

Thomas Blake Bowen, an IRS special agent with the criminal investigation division, interviewed Zygman at his tailor shop on May 24, 2006. (Tr. 2001:12-25.) The purpose of the interview was to discuss with Zygman a number of refund checks that were sent to an address in Mission, Texas that was associated with Zygman. (Tr. 2004:10-16.) Agent Bowen told Zygman that he was investigating an illegal tax fraud scheme concerning illegal refund checks. (Tr. 2004:20-2005:8.) Zygman told Agent Bowen that he had forwarded tax mail and tax refund checks to Berkowitz in Israel "three to four times" but he was no longer doing so and had no plans in the future to forward anything to Berkowitz. (Tr. 2007:12-16, 20-24; 2011:6-10.) Zygman never mentioned to Agent Bowen whether he had ever deposited any of the refund checks into his own bank accounts. (Tr. 2009:2-15.)

After the May 2006 interview with Agent Bowen, Zygman stopped making any deposits into the Alamo 6767 account and turned his attention to the Frost Bank 1807 account and a different Alamo account ending in 1948. (Tr. 2048:10-12; 2069:8-2070:17.) The first deposit into the Frost 1807 account was on July 17, 2006 in the amount of $2,882.72; Zygman withdrew this amount from the Alamo 6767 account on the same day and deposited it into the Frost 1807 one. (Tr. 2048:10-21.) From August 21, 2006 until December 10, 2007, Zygman deposited checks from the IRS and the following state departments of revenue: Alabama, Arizona, Georgia, Louisiana, Mississippi, New Jersey, New York, Oklahoma, and Virginia. (Tr. 2049:8-2052:24.) Agent Hatagan nicely summed up the deposit activity in the Frost Bank 1807 from its opening in July 17, 2006 to June 1, 2009, when the last check was deposited: "As to the deposit items that went into the account for that time period, we found there were 54 government checks that were issued in the names of other people. And of those 54, 47 of them were from state governments, and seven of them were issued by the United States Treasury. The amount of those 54 government checks was $149,321.96." (Tr. 2064:20-2065:1.) From July 20, 2006 to June 1, 2009 Zygman also made payments totaling $132,897.06 from the account to third parties for personal and business expenses, such as rent and car payments, dog grooming, and cash withdrawals. (Tr. 2057:4-2063:24; 2060:1-11.)

Moreover, Zygman used the Alamo 1948 account with increased regularity after the May 2006 meeting with Agent Bowen. (Tr. 2069:6-2070:17.) Zygman used this account similar to how he used the Frost Bank 1807 one; from February 27, 2006 to April 18, 2008, he deposited $21,840.29 in government checks that were not payable to him. (Tr. 2069:6-2071:5; 2074:7-9.) During this time period Zygman made $14,214.46 in withdrawals from the account for his personal benefit. (Tr. 2076:9-18.)

On May 21, 2009 Special Agent Scott Campbell and his partner interviewed Zygman, again at his tailor shop in McAllen, Texas. (Tr. 2055:14-17; 2093:15-22.) Zygman told the agents that following the May 2006 interview, when he received refund checks not addressed to him he gave them to the postal carrier or returned them to the post office. (Tr. 2097:7-12.) When the agents asked him about his bank accounts, he mentioned neither the two Alamo accounts nor the Frost National Bank one. (Tr. 2097: 13-22.)

B. Fernando Benalcazar

As discussed, Benalcazar does not challenge the sufficiency of the evidence at trial so the Court will only briefly address the trial testimony relevant to his role in the scheme. From about January 2004 through October 2005, Benalcazar opened nine bank accounts either in his name or in the name of Mi Casa Recovery, Mi Casa Developers, and Mi Casa Financial at Bank of America, Charter One, Citizens Bank & Trust, and Fifth Third Bank. That is, Benalcazar controlled addresses and bank accounts for Berkowitz and deposited over $1.8 million in government deposits into his accounts; hundreds of these checks, however, bounced so he had a total of over $1.5 million available for use in his accounts. (Tr. 1822:20-1824:13.) Benalcazar also helped another participant establish AZYG Corporation at Citizens Bank for the sole purpose of receiving direct deposits and tax refund checks. (Tr. 833:17-21; 841:25-842:23.)

Berkowitz described Benalcazar to another participant in the scheme as the person who "dealt with the money." (Tr. 408:6-409:3.) Berkowitz instructed participants in the scheme to receive refund checks from the IRS or state departments of revenue and forward them on to an address that he provided; Benalcazar paid many of the participants, one of which was Tiffany Lachner, for this work from his Mi Casa Financial, Mi Casa Recovery, and Mi Casa Developers accounts. (Tr. 410:3-413:21.)

STANDARD OF REVIEW

I. Motion for Judgment of Acquittal

A motion for judgment of acquittal under Rule 29 challenges the sufficiency of the evidence against a defendant. See Fed. R. Crim. P. 29 (requiring the Court to "enter a judgment of acquittal of any offense for which the evidence is insufficient to sustain a conviction"). In challenging the sufficiency of the evidence, Zygman "bears a heavy, indeed, nearly insurmountable, burden." United States v. Warren, 593 F.3d 540, 546 (7th Cir. 2010). Such a motion should be denied if, after viewing the evidence in the light most favorable to the Government, "any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." United States v. Hicks, 368 F.3d 801, 804 (7th Cir.2004). A conviction entered after trial by jury should not be overturned unless "the record is devoid of evidence from which a reasonable jury could find guilt beyond a reasonable doubt." United States v. Curtis, 324 F.3d 501, 505 (7th Cir.2003); United States v. Menting, 166 F.3d 923, 928 (7th Cir.1999).

II. Motion for New Trial

A motion for a new trial under Rule 33(a) should be granted only if required "by the interest of justice." Fed. R. Crim. P. 33(a). Such motions should be granted sparingly and are only appropriate if "substantial rights of the defendant have been jeopardized by errors or omissions during trial." United States v. Kuzniar, 881 F.2d 466, 470 (7th Cir.1989). A defendant is entitled to a new trial only if there is a reasonable possibility that a trial error had a prejudicial effect upon the jury's verdict. See United States v. Berry, 92 F.3d 597, 600 (7th Cir.1996).

DISCUSSION

I. Ostrich Instruction

The Court gave the jury an ostrich instruction as part of the instruction defining "knowingly," which was on page 42 of the final jury instructions. The second paragraph of that instruction, which Zygman and Benalcazar challenge, states as follows:

You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. You may not ...


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