Charles Hermanowski v United States of America & Ors [2005] NSWSC 145 | Case summary

Charles Hermanowski v United States of America & Ors [2005] NSWSC 145 | Case summary | Zoe

[11]

The nature of s 21 review 5 There was some issue between the parties concerning the nature of the review provided by s 21 of the Act. The United States of America (the United States) submitted that on the hearing of an application for a review of an order made by a magistrate, the Court is required to determine whether or not the magistrate's decision is erroneous in some respect. It was submitted to be incumbent on the applicant for review to identify the respect, or respects, in which the decision is attended by error. In the United States' submission, the Court would not consider a point that had not been taken before the Magistrate. It relied on the decision of the High Court in Pasini v United Mexican States [2002] HCA 3; 209 CLR 246 per Gleeson CJ, Gaudron, McHugh and Gummow JJ at 254-255, [14]-[18] in support of its submissions in this respect. 6 Senior counsel for the plaintiff submitted that the decision of the High Court in Pasini was not to be understood as disapproving the approach to the conduct of an s 21 review taken by French J in Cabal v United Mexican States No. 3 [2000] FCA 1204; 186 ALR 188 at 234, [115]. In that case, French J determined that it is open to a party to raise new points of law that do not have evidentiary implications. His Honour expressed his agreement with the observations of Hill J in Republic of South Africa v Dutton (9197) 77 FCR 128 at 134, that a s 21 review is a re-hearing limited to the material before the Magistrate. The Full Court in Cabal v United Mexican States [2001] FCA 427; 108 FCR 311 noted French J's acceptance of Hill J's observations of the nature of the review without criticism. Pasini was an appeal from the decision of the Full Court in Cabal and did not involve criticism of this statement. 7 The High Court in Pasini was dealing with a constitutional challenge to the exercise by the Federal Court of the power to review the order made by a magistrate under s 19 of the Act, it being contended that the power conferred was administrative and not judicial. This contention was rejected. 8 In Dutton v O'Shane [2002] NSWSC 1086 at [93], James J noted that the decision in Pasini had been delivered after the commencement of the hearing in that case. His Honour proceeded upon the basis that he should approach the review as a re-hearing, consistent with the statement of Hill J in Republic of South Africa v Dutton. 9 In Dutton v O'Shane [2003] FCAFC 195 the Full Court of the Federal Court observed at [148]: "…the s 21 review is not one of judicial review in the strict sense. It is by way of re-hearing in which the Court is authorised to reach its own conclusions on eligibility for surrender, albeit it is limited in so doing by having regard only to the material before the magistrate: Cabal v United Mexican States (2001) 108 FCR 311 at [100]; Cabal v United Mexican States (No. 3) [2000] 186 ALR 188 at [115]." 10 In the way the matter was argued, little turned on the question of the nature of the review. The plaintiff by his FAPOC identified a number of respects in which he contended the Magistrate erred. There was no challenge to the existence of the facts giving rise to the Magistrate's jurisdiction under s 19(1) or to the sufficiency of the other supporting documents produced to the Magistrate. All, save one, of the grounds on which the plaintiff relied relate to the sufficiency of the material supporting the request for extradition required by Article XI(3)(c) of the Treaty on Extradition between Australia and the United States that come into force on 14 May 1974 ("the Treaty"). The principal ground of challenge was one that was not advanced before the Magistrate by senior counsel then appearing on his behalf. This ground raises the content of the requirements of Article XI(3)(c). If this ground is made good it would follow that the material before the Magistrate was not sufficient to satisfy the requirements of Article XI(3)(c) in respect of any of the extradition offences. Given the nature of this challenge I did not understand the United States to submit that I would not entertain it. In any event, I consider it appropriate to approach the review consistently with the observations of the Full Court in Dutton that I have set out above.

[14]

13 Article XI(3)(c) of the Treaty (as amended by Article 7 of the Protocol) requires that a request for the extradition of a person who is sought for prosecution be supported by: "(c) a description of the facts, by way of affidavit, statement, or declaration, setting forth reasonable grounds for believing that an offence has been committed and that the person sought committed it." 14 The United States sought a determination that the plaintiff is eligible for surrender in relation to a number of extradition offences that are described in the second superseding indictment (RB 240-299) ("the indictment"). The offences that are the subject of the review comprise the following counts in the indictment: Counts 2 to 11 - allege the presentation of false and fraudulent claims upon the United States Department of Defense contrary to Title 18, United States Code ( USC ), sections 287 and 2. Count 22 - alleges a conspiracy to commit mail fraud, an offence contrary to Title 18, USC , section 371; Counts 23 to 34 - allege mail fraud contrary to Title 18, USC , sections 1341 and 2; Counts 40-51 and 64 - allege laundering the proceeds of mail fraud contrary to Title 18, USC , section 1956(a)(1)(B)(i) and (ii); Counts 52-63 and 65 - allege engaging in monetary transactions in excess of US$10,000 derived from the proceeds of mail fraud, contrary to Title 18, USC , sections 1957 and 2; Counts 68 and 69 - allege tax evasion contrary to Title 26, USC , section 7201 and Title 18, USC , section 2; and Counts 72-85 - allege making, aiding and assisting in the preparation of false tax returns, contrary to Title 26 USC , section 7206(2). 15 The supporting documents produced to the Magistrate by the United States included two affidavits by Assistant United States Attorney, Michael Davis. The first, sworn on 12 March 2002, relates to the Defense Department and mail fraud counts. The second, sworn on 6 June 2002, relates to the tax evasion counts. Two affidavits of Special Agent Mary Dino of the Criminal Investigation Section of the Internal Revenue Service were also produced. The first, sworn on 12 March 2002, relates to the Defense Department counts and the mail fraud counts, and the second, sworn on 10 June 2002, relates to the tax fraud counts. There was also an affidavit of Special Agent Michael Parker which was sworn on 12 March 2002 and related to a charge of obstruction of justice which is not relevant for the purposes of this review. 16 The principal way in which the plaintiff put his case on the review was a contention, which was not advanced by senior counsel appearing before the Magistrate on his behalf and not raised by his amended points of claim. It is that the requirement of Article XI(3)(c) - that there be a affidavit, statement or declaration containing a description of the facts setting forth reasonable grounds for believing that an offence has been committed and that the person the subject of the application committed it - is not satisfied by a description of facts that give rise to reasonable grounds for the belief by a process of inferential reasoning. The mandate that the description of the facts "set forth" reasonable grounds for the belief is said to require that the affidavit, statement or declaration articulate the grounds for the belief as distinct from giving an account of facts from which the conclusion, that there exist reasonable grounds for the belief, may be drawn.

[17]

I do not read her Honour's remarks as providing support for the construction of the Article for which the plaintiff contends. 20 The plaintiff submits that the point now taken was not put in Todhunter or Jacobi. In the plaintiff's submission, it is necessary that the Article be read strictly in accordance with its terms. My attention was directed to the meaning of the verb "to set forth" given in Black's Law Dictionary (United States of America: Thomson West, 8th edition, 2004), which is: to set out; to recite, explain, narrate or incorporate (facts or circumstances). The Shorter Oxford English Dictionary (Oxford: Oxford University Press, 5th edition, 2002), defines the term, relevantly, as: to give an account of especially in order, distinctly, or in detail; expound; relate; narrate; state; describe. 21 Some emphasis was placed by senior counsel on the plaintiff's behalf on the circumstance that it is the United States that determines the material that is placed before the Magistrate in support of the request and that the person the subject of the request has no opportunity to test the material. While this consideration may explain why it was thought necessary to require that a request for extradition be supported by a description of facts that provides reasonable grounds for believing both that an offence has been committed and that the person whose extradition is sought committed it, I do not see it as a consideration that favours the construction for which the plaintiff contends. 22 In the written submissions filed on the plaintiff's behalf it is noted that the question of whether the affidavit, statement or declaration sets forth reasonable grounds for the belief is a question for the magistrate's determination. An assertion of reasonable grounds for belief held by a prosecutor or an investigator cannot suffice. Accepting this is so, I do not see why any policy consideration would favour a construction that demands that the affidavit, statement or declaration articulate the steps in the process of inferential reasoning, as distinct from giving a description of primary facts from which the conclusion that reasonable grounds for the belief is either drawn or not as the case may be.

[18]

23 A construction of the Treaty emphasising substance over form and rejecting an overly technical approach has found favour in the Federal Court: Harris v Attorney-General (Cth) (1994) 52 FCR at 401-402 and the Full Court in Todhunter (at 86, [132], [133] and [134])). It seems to me that a description of facts may be said to set forth reasonable grounds for the belief that an offence has been committed, and that the person the subject of the request committed it, by the narration of primary facts that give rise to that conclusion. The construction of the Article for which the plaintiff contends would make its requirements difficult to satisfy in a circumstantial case, no matter how compelling the inference (of reasonable grounds for belief) to be drawn from the description of the facts might be. The Article requires a description of facts setting forth reasonable grounds for the belief. It does not require a description of the facts and the inferences that are said to arise from them setting forth reasonable grounds for the belief. I am not persuaded that this ground of challenge to the approach adopted by the Magistrate (or this Court upon the review) has merit. 24 In paragraph [5] of the FAPOC, the plaintiff contends that the Magistrate erred in finding that the material produced by the United States was capable of satisfying the criteria in Article XI(3)(c) for the reasons set out in the written submissions that were before her (RB 382-389 paragraphs [4] - [24]). 25 As the United States sets out in an annexure to written submissions filed on its behalf, a number of the plaintiff's written submissions referred to globally in this ground were accepted by the Magistrate. The submission that she rejected was that developed in the plaintiff's written submissions at RB 387, [19]. It was: "in a case such as this, with numerous fraud allegations arising from complex commercial transactions and relationships, and difficult issues of knowledge and intent, Article XI(3)(c) requires the USA to provide affidavits, statements or declarations from the central witnesses setting out the evidence that they would be expected to give at trial supported, as appropriate, by relevant documentation and exhibits."

[19]

26 The terms of Article XI(3)(c) do not support the contention that the United States was required to provide affidavits, statements or declarations from the central witnesses setting out the evidence that they would be expected to give at trial. The submission finds no support in Todhunter or Jacobi. It was not a ground of challenge that was pressed at the hearing of the review. I am not persuaded that it has merit. 27 The complaint that was developed on the hearing of the review was that it is necessary that the affidavit, statement or declaration containing the description of the facts identify the source of the factual assertions made in it. The mere recital by an investigator that something is the fact without providing the basis for the assertion was submitted to fall short of providing reasonable grounds for belief. 28 In George v Rockett (1990) 170 CLR 104 the High Court held: "When a statute prescribes that there must be "reasonable grounds" for a state of mind - including suspicion and belief - it requires the existence of facts which are sufficient to induce that state of mind in a reasonable person. … The objective circumstances sufficient to show a reason to believe something need to point more clearly to the subject matter of the belief, but that is not to say that the objective circumstances must establish on the balance of probabilities that the subject matter in fact occurred or exists: the assent of belief is given on more slender evidence than proof. Belief is an inclination of the mind towards assenting to, rather than rejecting, a proposition and the grounds which can reasonably induce that inclination of mind may, depending on the circumstances, leave something to surmise or conjecture" (at 112 and 116). 29 The description of the facts contained in the affidavit, statement or declaration for the purposes of Article XI (3)(c) need not be of facts that are admissible in evidence. As the plaintiff acknowledged, the description may include hearsay assertions (RB 388, [22]). The question of whether the description of facts sets forth reasonable grounds for the requisite belief may involve consideration of whether a source is identified for a particular assertion. I am not persuaded that as a general proposition it is necessary for the source of the facts asserted to be identified in the affidavit, statement or declaration in order to satisfy the requirements of the Article: Todhunter (Spender J) at 251 and Jacobi at 7. 30 I propose to deal with the challenge that the Magistrate erred in finding the material was capable of satisfying Article XI(3)(c) by reference to the particular challenges that were developed on the hearing of the review and in the FAPOC. The Department of Defense counts - counts 2 to 11. 31 The plaintiff submits that the Magistrate erred in finding that the criteria in Article XI(3)(c) were satisfied in relation to counts 2 - 11 of the indictment. 32 It is convenient to refer to the background as set out by the Magistrate at the commencement of her reasons (at RB 495-496): " Background From the early 1990's until at least some time in the spring of 1998, the respondent, and his wife, owned a series of cable television companies (the Hermanowski companies) that operated in the United States and Japan. Throughout this period the respondent, as well as Alice Pirchesky (Pirchesky), who was the Comptroller of the Hermanowski companies and Rick Hensley (Hensley), who was the Treasurer and Director of Finance of the Hermanowski companies, together with other employees of the Hermanowski companies, worked at the central office of the Hermanowski companies, located in the Miami area. United States Department of Defense counts The Hermanowski companies provided cable television reception services (services) to both private homes and military personnel residing on United States military bases, the latter being pursuant to agreements with the United States Department of Defense. Under these agreements, the Hermanowski companies were responsible for performing all the work necessary to provide the services to individual bases, such as installing the necessary cable and wiring, and were responsible for bearing the expenses associated with that work. From the early 1990s the Department of Defense started to close down bases in the United States, for at least ten of which the Hermanowski companies had provided services. The Hermanowski companies were allowed to seek reimbursement from the Department of Defense for losses relating to certain costs that they could show were sustained while providing the services to the subsequently closed bases. The applicant alleges that the respondent conspired with Pirchesky (and possibly others), and also acted through others, to defraud the Department of Defense by preparing and lodging forms for reimbursement, known at Termination Settlement Proposals (TSPs), that he (and any co-conspirator) knew sought reimbursement for false and fictitious invoices for work on those bases that was never carried out. Counts 1, 2-11, and 12-21 charged the respondent with various offences arising from this alleged behaviour." 33 The indictment particularised counts 2 - 11 as offences contrary to Title 18, USC ss 287 and 2. Each alleged that: "On or about June 10, 1997, at Miami, Miami-Dade County, in the Southern District of Florida, and elsewhere, the defendants, Charles Hermanowski a/k/a "John Stobierski", and Alice Pirchesky, made and presented to the Department of Defense claims upon and against the United States and the Department of Defense, that is, the defendants claimed and caused to be claimed costs in the amounts set forth below, which costs were contained within "Settlement Proposals" (also known as "Termination Settlement Proposals" or "TSPs") regarding the military bases identified below, knowing that the costs claimed were materially false, fictitious, and fraudulent, in that certain of the costs claimed in the TSPs were never incurred and were based upon false and fraudulent invoices for work never performed." 34 The Magistrate referred to the first Davis affidavit for a statement of the elements of the offence charged in counts 2 - 11 (RB 559). She noted that the offence comprises two elements: "First: that the respondent knowingly presented to an agency of the United States a false and fraudulent claim against the United States, as charged in the indictment Second: that the respondent acted wilfully and with knowledge of the false and fraudulent nature of the claim."

[20]

Also by reference to the first Davis affidavit, the Magistrate noted that a claim will be "false" or "fraudulent" if it is untrue at the time it is made and is then known to be untrue by the person making it. Her Honour noted that it is not necessary to show that the government agency was in fact deceived or mislead. 35 The Magistrate noted that the offences charged in each of counts 2 - 11 are drafted by reference to the provisions of Title 18, USC, s 2 which makes provision for liability as an accessory (at RB 560). She set out the terms of the provision by reference to the first Davis affidavit (at RB 560): "(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal. (b) Whoever wilfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal." 36 The Magistrate determined that the description of the facts contained in the first Dino affidavit set forth reasonable grounds for belief that the offences charged in counts 2 - 11 had been committed and that the plaintiff had committed them (at RB 536-549). 37 The plaintiff submits that the Magistrate wrongly relied on parts of the first Davis affidavit in determining that the requirements of Article XI(3)(c) had been satisfied. The first Davis affidavit was relevant to the different requirements imposed by Article XI(2)(b),(c), and (d) and is submitted not to be relevant to a consideration of the requirements of Article XI(3)(c). 38 The Magistrate said this (at RB 519): " Relevance of the Davis affidavits Mr Neil submits that, by parity of reasoning from Jacobi , the statements of fact in the Dino affidavits, they being annexures to the Davis affidavits, are to be treated as the factual statements of Davis himself. Mr Game submits that the Davis affidavits are of no assistance in establishing the facts, and that the Court should confine itself to the material averred to in the Dino affidavits. He says that it is clear that the purpose of the Davis affidavits is to establish the substrata for Art XI(2), namely a description of the conduct, a statement of the law describing the essential elements and punishment, and that no part of them purports to set out a description of the facts. He points, in particular, to the many examples in the Davis affidavits of his express reliance on the Dino affidavits in regard to the factual material. I accept that there is some strength in Mr Game's characterisation of the Davis affidavit. Nonetheless, it is clear that there may well be some overlap between the material required under Art XI(2)(b) and s 19(3)(c)(ii) by way of a statement or description of "conduct" constituting the offence, and the material required by way of a description of the "facts" under Art XI(3)(c): Todhunter , Full Court, at 90. Accordingly, I consider that the statement or description of "conduct" provided in the Davis affidavits is relevant to the Court's consideration of Art XI(3)(c), although for practical purposes, I accept that it adds very little, if at all, to the "description of the facts" provided in the Dino affidavits. Equally, I consider that the affidavit of Parker adds nothing material to the description of the facts. Accordingly, in Parts 3-5 of this judgment, I identify the description of the facts by reference only to the first and second Dino affidavits. However, I consider that the Court is entitled to accept that Davis, as an Assistant US Attorney, with his background, knowledge and experience in US criminal law prosecutions, and his stated familiarity with the charges, the investigation, and the evidence in this case, (paragraphs [2] and [3] of both his affidavits) was in a position to properly assess the "description of the facts" provided in the Dino affidavits, and the basis of those facts. I consider that his adoption of this factual material provides some support for its reliability." 39 Part 3 of the Magistrate's judgment deals with counts 2 - 11 and sets out by reference to the first Dino affidavit the description of the facts upon which the United States relied. It was necessary for the Magistrate to be satisfied that the description of the facts set forth reasonable grounds for believing that each element of the offence charged in counts 2 - 11 had been established. She approached the matter in this way. She turned to the question of whether the description of the facts set forth reasonable grounds for the belief that the plaintiff knowingly presented to an agency of the United States a false and fraudulent claim against the United States (at RB 564). She observed that his liability was pleaded as being accessorial and that liability as an accessory under Title 18, USC, s 2 would be satisfied by evidence that he directed or authorised the presentation of the false claim (at RB 564.S). 40 In determining that the description of the facts set forth reasonable grounds for the requisite belief with respect to counts 2 - 11, the Magistrate referred to her earlier findings with respect to the offence charged in count 1 (at RB 564.T).

[26]

(i) The plaintiff was the owner of the Hermanowski companies (paragraph [6] of the first Dino affidavit). (ii) Hermanowski and his wife had control of the Hermanowski companies (paragraph [6] of the first Dino affidavit). (iii) The Hermanowski companies were all managed from a central office in the Miami area (paragraph [7] of the first Dino affidavit). (iv) Hermanowski worked from the Miami office together with the personnel who were involved in keeping and maintaining the Hermanowski companies' books and records (paragraph 7 of the first Dino affidavit). (v) Mr Fortner, of the Defense Contact Audit Agency, had visited the Miami office of the Hermanowski companies and examined and copied some of the CCU Inc and Mausina invoices and noted certain irregularities in the form of the purported CCU Inc invoices and sent several of the purported invoices to an employee of CCU Inc (paragraph [22] of the first Dino affidavit). (vi) The CCU Inc employee indicated that CCU Inc had no record of doing the work associated with the invoices and that the invoices lacked certain information associated with invoices generated by CCU Inc (paragraph [22] of the Dino affidavit). 43 In dealing with the status of the Termination Settlement Proposals (TSPs), the Magistrate observed that these had been lodged by the Hermanowski companies with the Department of Defense and that they claimed at least $US8 million for the invoices purportedly from CCU Inc and Mausina ([14] and chart summary in paragraph [20] of the first Dino affidavit). She considered that these facts set forth reasonable grounds for believing that the TSPs lodged by the Hermanowski companies were false, given that the invoices were false (RB 555.E). 44 The Magistrate took into account further facts in determining that the description of the facts set forth reasonable grounds for belief that (i) the TSPs sought reimbursement for false CCU Inc and Mausina invoices, (ii) the plaintiff was directly and knowingly involved in the creation of the false invoices, and (iii) he was aware of the entry of those invoices into the books and accounts of the Hermanowski companies. The additional matters that she took into account were that the plaintiff was the owner and the ultimate beneficiary of the Hermanowski companies and that he worked in the same location as both Pirchesky, who had been involved in the preparation and drafting of the TSPs, and Hensley, who signed them. In these respects she referred to paragraphs [13], [16] and [7] of the first Dino affidavit. She also took into account that the TSPs dealt with reimbursement for a key aspect of the plaintiff's business, namely the costs incurred by the Hermanowski companies in having sub-contractors install the necessary cable and wiring in various defence bases. She took into account the contents of paragraphs [6], [10], [11] and [12] of the first Dino affidavit in this latter respect (RB 565.E). 45 The Magistrate considered the second element of the offences charged in counts 2 - 11, that the plaintiff acted wilfully and with knowledge of the false and fraudulent nature of the claims, by reference to the same considerations as she had dealt with in relation to count 1 concerning the status of the CCU Inc and Maucina invoices and the status of the TSPs. She considered that the description of the facts provided reasonable grounds for belief that the second element was satisfied. 46 The Magistrate's reasons with respect to the sufficiency of the description of the facts for the purposes of Article XI(3)(c) in respect of counts 2 to 11 are set out at RB 553 commencing, "reasonable grounds for belief: count 1", going over to RB 565 under the subheading "counts 2 to 11: conclusion". In this part of her judgment she analyses the facts described in the first Dino affidavit that touch on count 1 and counts 2 to 11 of the indictment. She refers only to the first Dino affidavit in concluding that the description of the facts sets forth reasonable grounds for the belief. 47 In the passage that I have set out at [38] above the Magistrate made clear that the description of the facts set out in parts 3 - 5 of her reasons relates only to the first and second Dino affidavits. She considered the circumstance that Assistant US Attorney Davis had adopted the Dino affidavits provided some support for an acceptance of the reliability of that material. It is to be noted that she considered the relevance of the Davis affidavit to the consideration of the sufficiency of the material to satisfy Article XI(3)(c) to "add very little, if at all to the description of the facts". 48 The description of the facts in the affidavit, statement or declaration must itself set forth reasonable grounds for the requisite belief. If the Magistrate concluded that the first Dino affidavit set forth reasonable grounds for the requisite belief by reason that it had been adopted by Assistant US Attorney Davis it would seem to me to be an error. An analysis of the Magistrate's reasoning to my mind does not suggest that in fact she approached her task in this way. I am, in any event, of the opinion that the description of the facts contained in the first Dino affidavit with respect to the elements of the offences charged in counts 2 - 11 (that I have summarised it [41] - [44] above) satisfies the requirements of Article XI(3)(c).

[31]

54 The matter raised by (i) above was addressed in the plaintiff's written submissions before the Magistrate (RB 392-394). It was there contended that the creation of the invoices commenced in the early 1990s, a time well before May 1997 when Pirchesky prepared the TSPs. The United States acknowledged that at the time the false invoices had been created for a different and more immediate purpose (than their eventual inclusion in support of the TSPs). I consider that it was open to the Magistrate to conclude having regard to the facts set out at paragraphs [41] to [44] above that the description of the facts set forth reasonable grounds to believe that the plaintiff wilfully directed or authorised the submission of the false TSPs. 55 It was submitted that the Magistrate's findings, both that the TSPs were not in the nature of minor administrative matters and that they dealt with reimbursement for a key aspect of the respondent's business, were assumptions for which there was no support in the description of the facts. The material that the Magistrate took into account in coming to these findings is set out at RB 565.E. It included that the plaintiff operated fifteen to twenty small cable television companies (the Hermanowski companies) in the United States and Japan from the early 1990s to some time in the Spring of 1998. During the relevant period, the Hermanowski companies provided services to private homes and to military personnel residing on miliary bases. The services were provided under agreements with the Department of Defense. Under the agreements, the Hermanowski companies were responsible for performing all of the work necessary to provide cable television services to the bases such as installing the cable and wiring, and bore responsibility for the expense associated with this work. In the early 1990s the Department of Defense started to close down a number of military bases. At least ten of the bases to be closed were those to which the Hermanowski companies provided cable television services. The Hermanowski companies were permitted to apply for reimbursement from the Department of Defense for losses relating to certain of the costs that were sustained in the provision of services to the closed bases. In order to obtain reimbursement, the Hermanowski companies were required to identify their reimbursable losses on TSPs. On 10 June 1997, five of the Hermanowski companies submitted a total of ten TSPs claiming an amount of approximately US$8 million.

[33]

59 The Magistrate considered that the description of the facts relevant to the cable television network counts was to be found in paragraphs [26] to [45] of the first Dino affidavit. 60 Agent Dino stated (at paragraph [29] of her first affidavit): "Starting some time in the early 1990s, Hermanowski instructed Hensley and Pirchesky that the Americable companies were going to pay the Networks for only 77% of the correct subscriber figures and withhold the remaining amount owed, but not disclose this to the networks. Pirchesky implemented this scheme by having employees of the accounting department of the Hermanowski cable television companies manipulate the subscriber figures so that each month the Hermanowski cable television companies would report to most of the Networks only 77% of the actual number of subscribers." 61 In paragraph [8] of his FAPOC, the plaintiff identifies the following errors in the Magistrate's reasons: "(i) Her Honour accepted that the material failed to provide any details of the relevant financial and contractual relationships between the plaintiff's companies and the cable networks (RB 587N). (ii) Her Honour considered the alternative innocent explanation, of a bad debt allowance, on the premise that the plaintiff bore the onus of establishing that explanation (RB 588G). This involved error because the onus of negating the alternative explanation, by satisfying the criteria in Article XI(3)(c) of the Treaty, fell to the first defendant. (iii) In the absence of relevant details of the financial and contractual relationships between the plaintiff's companies and the cable networks, her Honour erred in finding that the criteria in Article XI(3)(c) of the Treaty were satisfied (RB 587P-588T)." 62 The plaintiff relies on paragraph [43] of the first Dino affidavit, which is in these terms: "Some time between April 4, 1994, and April 8, 1994, after an auditor employed by Showtime Network detected the pattern of under payments, Pirchesky falsely explained to the auditor that longtime payments of funds owed by the Hermanowski cable television companies was the result of a 23% "bad debt allowance"". 63 It was submitted that the description of the facts failed to address an alternative hypothesis consistent with the plaintiff's innocence: that under-reporting of subscribers was authorised as a legitimate set-off for bad debts owed by the cable networks to the Hermanowski companies. 64 In the plaintiff's submission, there was no material to support the conclusion that Pirchesky's explanation was false. No details of the contractual relationship between the Hermanowski companies and the cable networks were set out. No attempt was made to demonstrate that there were no bad debts, or that a set-off by way of a "bad debt allowance" had not been contemplated in the contractual arrangements between the Hermanowski companies and the respective networks. 65 In the absence of the provision of more detail with respect to the financial and contractual relationships between the Hermanowski companies and the networks, it is put, there was no basis for forming a belief, on reasonable grounds, that the cable television offences had been committed. 66 In concluding that the description of the facts set forth reasonable grounds for believing that the plaintiff had committed the offences alleged in counts 22 - 34, the Magistrate gave consideration to the submissions that had been advanced on his behalf with respect to the suggested alternative hypothesis consistent with innocence (at RB 587-588). She acknowledged that the first Dino affidavit did not provide details of the relevant financial and contractual relationships between the Hermanowski companies and the networks, but that in her view the absence of this material was not determinative. She took into account the following: · The explanation offered by Pirchesky in April 1994 that the underpayments were a legitimate set-off was inconsistent with the plaintiff's letters sent to the networks between 5 March and 7 May 1998 which asserted that a 'long-term employee' whom the company had 'recently lost' had been responsible for the underpayments which had been discovered through 'an extensive in-house audit' (Dino affidavit [44]). · One would not expect letters of the character of those sent to the networks between 5 March and 7 May 1998, described at paragraph [44] of the Dino affidavit, acknowledging underpayments and attributing blame for them to a former long-term employee, to have been sent to the networks if the underpayments were a lawful incident of the financial and contractual relationships between the Hermanowski companies and the networks. · Pirchesky's explanation in 1994 for the underpayments is not consistent with other facts disclosed in the Dino affidavit, namely, that cheques made out from the Hermanowski companies to the networks in the amount of the underpayments were endorsed by the plaintiff and deposited by him into his personal bank account at the Community Bank (Dino affidavit paragraphs [34] to [37]). · Pirchesky's explanation in 1994 was not consistent with the repayment in excess of $US 2 million to the Networks by a Hermanowski company, Michigan and Indiana Cable Associates, in May 1998. · The Pirchesky explanation lacks commercial reality in the following respects: (i) It was said that the under reporting constituted 'a legitimate set-off for bad debts owed by the networks to the Hermanowski companies' as the Magistrate noted, this begged the question of the circumstances in which the networks might owe money to the Hermanowski companies rather than vice versa;

[36]

67 To my mind it is not apt to speak in terms of the reversal of an onus. The matter that the Magistrate was required to address in making a determination under s 19 was whether, inter alia, the request was supported by a description of facts that satisfied the requirements of Article XI(3)(c). A description of facts may set out reasonable grounds for belief notwithstanding that possible hypotheses consistent with innocence have not been excluded: George v Rockett at 116; Jacobi at 7 and 8. 68 I am not persuaded that the Magistrate erred in concluding that the description of facts in the first Dino affidavit set out reasonable grounds for believing that the plaintiff committed the offences charged in counts 22 - 34, notwithstanding that the first Dino affidavit did not contain details of the financial and contractual relationships between the Hermanowski companies and the cable network companies. The mail fraud counts - counts 40 - 65 69 The plaintiff submits that the Magistrate erred in finding that the criteria in Article XI(3)(c) were satisfied in relation to counts 40 - 65 of the indictment. He relies on the written submissions that were before the Magistrate in support of this ground (reproduced at RB 398 - 402). 70 Counts 40 - 51 and 64 charge the plaintiff with laundering the proceeds of mail fraud with intent to conceal and disguise the nature, location, source, ownership and control of the mail fraud proceeds, contrary to Title 18, USC, s 1956(a)(1)(B)(i) and (ii). The elements of these offences are set out in the first Davis affidavit (at RB 35 - 36, [46] - [48]). In order for the plaintiff to be convicted of the offences it is necessary for the United States to establish the following four elements: "First: That the Defendant knowingly conducted, attempted to conduct, or caused to be conducted a "financial transaction" as hereafter defined; Second: That the Defendant knew that the funds or property involved in the financial transaction represented the proceeds of some form of unlawful activity; Third: That the funds or property involved in the financial transaction did in fact represent the proceeds of mail fraud; and Fourth: That the Defendant engaged in the financial transaction knowing that the transaction was designed in whole or in part to conceal or disguise the nature, location, source, ownership or the control of the mail fraud proceeds." 71 A number of the terms are defined for the purposes of the offence in the first Davis affidavit: "To act "wilfully" means to act voluntarily and purposely, with the specific intent to do something the law forbids; that is, with bad purpose either to disobey or disregard the law.

[37]

… The term "conducts" means initiating, concluding, or participating in initiating or concluding a transaction. The term "transaction" includes depositing funds into a bank account. The term "financial transaction" includes a transaction which in any way or degree affects interstate or foreign commerce involving one or more 'monetary instruments' which includes personal cheques. The term "interstate or foreign commerce" includes any commercial activity that involves transportation or communication between places in two or more States or between some place in the United States and some place outside the United States. The deposit of a cheque into a bank whose deposits are insured by the Federal Deposit Insurance Corporation is sufficient to show that the transaction affected 'interstate or foreign commerce' for the purpose of this statute. The term "knowing that the funds or property involved in the financial transaction represented the proceeds of some form of unlawful activity" means that the defendant knew that such funds or property represented proceeds from some form, though not necessarily which form, of a felony offense under State or Federal law." 72 The description of the facts relied on for the mail fraud counts are set out in the Dino affidavit (at RB 184-197; [26]-[45]). The Magistrate reviewed the facts relating to the proceeds of mail fraud counts at RB 604-610. 73 The first element of the offences charged in counts 40 - 51 is that the respondent knowingly conducted, attempted to conduct, or caused to be conducted a "financial transaction". The Magistrate identified the cheques set out in the table at paragraph [37] of the first Dino affidavit as the financial transaction (RB 607.O). 74 The Magistrate took into account the following facts described in the first Dino affidavit: (i) Employees of the Hermanowski companies wrote cheques representing the unpaid amounts to the networks (RB 607.Q); (ii) The plaintiff knowingly endorsed cheques in the name of the network payees and deposited them into his account at the Community Bank (RB 607.R); (iii) Deposits at the Community Bank were insured by the Federal Deposit Insurance Corporation (RB 607.S). 75 The Magistrate determined that the description of these facts set forth reasonable grounds for believing that the first element of the offence had been established in counts 40-51. 76 Next the Magistrate considered the first element of the offence charged in count 64. This count related to the transfer of cheque number 650, written by the plaintiff, made payable to Americable International Japan Inc (one of the Hermanowski companies) from the Community Bank account. The Magistrate relied upon the facts set out in paragraphs [40], [41] and [42] of the first Dino affidavit in concluding that there were reasonable grounds for believing that the first element was satisfied with respect to count [64]. The facts that she relied upon in this respect were that cheque number 650 was written by the plaintiff, was payable to American International Japan Inc (one of the Hermanowski companies) and was drawn on his account at the Community Bank (RB 607-608). The funds had been returned to the Hermanowski companies as "shareholder loans" (RB 608.D). Cheque number 650 was deposited into Suntrust, whose deposits were insured by the Federal Deposit Insurance Corporation (RB 608.E). 77 With respect to the second element of offences 40 - 51 and 64, the Magistrate found that the description of facts in the Dino affidavit set forth reasonable grounds for believing that the plaintiff knew that the funds in the financial transaction represented the proceeds of some form of unlawful activity. She referred to her earlier findings at RB 589-590 based upon paragraphs [34]-[42] of the first Dino affidavit. 78 With respect to the third element of the offences charged in counts 40 - 51, the Magistrate concluded that the description of facts set forth reasonable grounds for believing that the funds involved in the financial transaction did in fact represent the proceeds of mail fraud. The facts that she relied upon were those set out with respect to her determination as to the existence of reasonable grounds for belief with respect to counts 22, and 23 - 34. 79 Taking into account the description of the facts with respect to the first element of count 22, the Magistrate considered that the United States had set forth reasonable grounds for believing that the respondent had established the fourth element of the offences charged in counts 40-51 and 64, namely, that the plaintiff engaged in the financial transaction knowing that the transaction was designed in whole or in part to conceal or disguise the nature, location, source, ownership or the control of the mail fraud proceeds. 80 In the proceedings before the Magistrate it was argued on the plaintiff's behalf that the facts in the first Dino affidavit disclosed that from mid-1992 to mid-1995 the withholdings from the cable Networks had been allowed to gradually accrue on the Hermanowski companies' books and records as a debt owed to the cable networks, which was not yet paid. It had not been until between 1995 and 1998 that the cheques made payable to the cable networks had been drawn. The payments withheld from the cable networks had been merged with legitimately earned funds over the period from 1992 to 1998. There was no material to show that the legitimately earned funds in the Hermanowski companies' bank accounts were insufficient to cover the amount of the cheques made payable to the cable networks. The plaintiff submitted that without such evidence the United States could not show reasonable grounds to believe that the cheques were, in fact, the proceeds of alleged mail fraud: US v Loe 248 F.3d449 at 467 (10th Cir.2001). On the hearing of the review the plaintiff disavowed reliance on Loe. 81 The offence requires proof of dealing with the proceeds of mail fraud. Counsel referred to the assertion in paragraph [34] of the first Dino affidavit that "[f]rom mid-1992 through mid-1995, Hermanowski allowed the proceeds of the fraud to accrue on the companies' books and records as funds owed to the cable television networks but not yet paid." It was submitted that this assertion confuses accounting entries and cash. It was said to be unhelpful to speak of allowing the proceeds of fraud to accrue on the companies' books. In the plaintiff's submission it is impossible, in the absence of evidence as to the state of the Hermanowski companies' accounts, to come to a reasoned conclusion as to what the cheques described in paragraph [37] represented. 82 The facts set out in the first Dino affidavit included the following: the plaintiff instructed Hensley and Pirchesky that the Americable companies were going to pay the networks for only seventy-seven percent of the correct subscriber figures and withhold the remaining amount owed (paragraph [29]). In the three years prior to mid-1995 the amount by which the networks had been underpaid was recorded on the companies' books as funds owed to the networks (paragraph [34]). Commencing in mid-1995 the plaintiff had company employees write cheques from the Hermanowski companies made payable to the networks representing the funds that had been withheld from them (paragraph [34]). The books of the Hermanowski companies were written up so as to represent that the Networks had been paid (paragraphs [34] and [39]). The cheques constituting the "financial transaction" for the purpose of these offences (that are itemised in paragraph [37] of the first Dino affidavit) were drawn in sums that were recorded in the Hermanowski companies' books of account as owing to the networks. The figures represented in each instance the underpayment the subject of the false subscriber reports. It seems to me that the description of these facts discloses reasonable grounds to believe that the funds involved in the financial transaction represented the proceeds of mail fraud. 83 This principal ground of challenge applied to all of the counts alleging laundering the proceeds of mail fraud. Included among these are counts 51 and 63 which relate to the Playboy Channel. A discrete point was taken with respect to these counts. There is no reference in the first Dino affidavit to the Playboy Channel in the description of the false subscriber fee remittance reports. The plaintiff acknowledged that the mailings listed in the chart does not purport to constitute all the false subscriber reports generated and mailed by the Hermanowski companies over the course of the scheme (at paragraph [31] of the first Dino affidavit). Nonetheless in the plaintiff's submission there is nothing to show that invoices were supplied to Playboy and nothing setting forth reasonable grounds for belief that any offence relating to the Playboy Channel had been committed. 84 Paragraph [36] of the first Dino affidavit contains a chart identifying cheques written by Pirchesky and signed by Hensley, through which the plaintiff moved funds from the Hermanowski companies to the account in his name with the Community Bank by falsely endorsing the cheques in his favour and depositing them. Cheque No. 2980 was made payable to Playboy and corresponds to the particulars given for counts 51 and 63. I consider that with respect to the Playboy counts it was open to the Magistrate to conclude that the description of the facts in the Dino affidavit set forth reasonable grounds for believing that an offence had been committed and that it was the plaintiff who had committed it. 85 Counts 52 - 63 and 65 are also mail fraud counts and involve the same set of transactions as counts 40 - 51 and 64. The plaintiff relies on the same challenge with respect to them, namely the absence of material to provide reasonable grounds for belief that the property was derived from mail fraud. I am satisfied that the description of facts set forth reasonable grounds for the requisite belief with respect to these counts. 86 The balance of the counts upon which the plaintiff was found to be eligible for surrender alleged the commission of taxation offences. No particular error was identified by the plaintiff in the approach that the Magistrate took to her determination of these counts. Rather, the plaintiff relies upon his overarching submission that it had not been open to the Magistrate to be satisfied on the material before her that the requirements of Article XI(3)(c) had been met, since the description of the facts did not articulate the reasonable grounds for belief, but merely set out facts from which the conclusion of the existence of reasonable grounds for belief might be drawn. 87 I have considered the sufficiency of the description of the facts in the first Dino affidavit to satisfy the requirements of Article XI(3)(c) with respect to each of the counts in the indictment that are the subject of this review, save for the taxation counts. I am satisfied in each case that the requirements of Article XI(3)(c) have been met. No submission was advanced with respect to the taxation counts, save the submission to which I have referred and which for the reasons earlier stated I reject. 88 On the hearing of the review the plaintiff maintained the submissions that had been before the Magistrate and are set out at RB 402-404, [62]-[70] concerning dual criminality. Those submissions contend that the protection afforded under s 19(2)(c) of the Act, with its requirement to establish dual criminality, extends to preventing double punishment for a single course of conduct. Senior Counsel did not seek to develop submissions on this ground of challenge in light of the present state of authority. I am satisfied that the Magistrate was correct in rejecting the plaintiff's submissions in this respect: Pearce v R [1998] HCA 57; 194 CLR 610.

Charles Hermanowski v United States of America & Ors

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Judgment (40 paragraphs)

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Legislation Cited (1)

Cases Cited (11)

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