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United States v. Simmons, No. 12-4469

Decided: December 11, 2013

The Fourth Circuit affirmed Keith Simmons’s (Simmons) convictions for securities fraud and wire fraud, but reversed his conviction for two counts of money laundering because the transactions underlying these latter convictions constituted essential expenses of Simmons’s fraudulent endeavor.  The Fourth Circuit therefore affirmed the decision of the United States District Court for Western District of North Carolina in part, reversed the decision in part, vacated Simmons’s sentence, and remanded the case.

Simmons operated a Ponzi scheme called Black Diamond Capital Solutions (Black Diamond) from April 2007 to December 2009.  He promised investors that, inter alia, he would invest their money in a foreign currency exchange, and that the investors could withdraw their investments at will after an initial ninety-day period.  Because numerous investors received returns from Black Diamond when they withdrew money after the ninety-day period, they sent Simmons even more money.  In reality, however, Simmons simply used deposits from subsequent investors to pay “returns” to earlier ones; furthermore, instead of investing in a foreign currency exchange, he used investments for his own purposes.  Simmons’s Ponzi scheme eventually unraveled.  The FBI raided his offices in December 2009, and Simmons confessed to the fraud.  A jury subsequently convicted Simmons on one count of securities fraud, one count of wire fraud, and two counts of money laundering; both of the money laundering convictions arose from payments Simmons made to Black Diamond investors.  Simmons challenged his convictions for money laundering on appeal, arguing that his payments to the investors did not involve the “proceeds” of fraud under 18 U.S.C. § 1956(a)(1)(A)(i).  He relied on United States v. Santos, 553 U.S. 507, in which a Supreme Court plurality held that the term proceeds only covers the profits of criminal endeavors—thus excluding the essential “crime-related expenses” of the underlying crime from the scope of the money laundering statute.

The Fourth Circuit noted that, though Congress effectively overruled Santos by amending the money laundering statute and defining proceeds to include “gross receipts,” 18 U.S.C. § 1956(c)(9), Congress’s amendment “was not enacted at the time of the conduct giving rise to Simmons’s money-laundering convictions”; thus, the court was bound by the Santos framework rather than Congress’s expanded definition.  Applying Santos, the Fourth Circuit found that Simmons’s payments to Black Diamond investors were essential to the operation of his fraudulent scheme.  The court noted that the victims who received the payments underlying Simmons’s money laundering charges “testified to the critical importance of those payments in fostering the (misplaced) confidence necessary to perpetuate fraud”; that Simmons’s scheme unraveled after he ceased making payments to investors; that the Government treated the payments as essential to the fraud throughout its prosecution; that payments to early investors “are understood to constitute essential features of Ponzi schemes”; that the Ninth Circuit reached the same conclusion in a similar case, United States v. Van Alstyne, 584 F.3d 803; and that, during the Congressional deliberations surrounding the congressional amendment of the money laundering statute, a Senate Report noted that payments from Ponzi schemes did not constitute money laundering under existing statute.

Full Opinion

– Stephen Sutherland