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United States v. Peithman

United States Court of Appeals, Eighth Circuit

February 27, 2019

United States of America Plaintiff - Appellee
Allen E. Peithman, Jr. Defendant-Appellant United States of America Plaintiff - Appellee
Allen E. Peithman, Jr. Defendant-Appellant United States of America Plaintiff - Appellee
AEP Properties, L.L.C. Defendant-Appellant United States of America Plaintiff - Appellee
Sharon A. Elder Defendant-Appellant

          Submitted: November 14, 2018

          Appeals from United States District Court for the District of Nebraska - Lincoln

          Before BENTON, BEAM, and ERICKSON, Circuit Judges.


         In 2013-2014, law enforcement officers in Lincoln, Nebraska, began focused investigations on "smoke shops" selling "potpourri," a product containing synthetic marijuana that when consumed sometimes resulted in significant adverse health effects. "Dirt Cheap" owned by Allen E. Peithman, Jr. and "Island Smokes" owned by Sharon A. Elder were two of the shops investigated. Elder is Peithman's mother.

         Peithman, AEP Properties, and Elder[1] were charged in a 14-count indictment. The indictment contained conspiracy charges pertaining to the distribution of drug paraphernalia, the distribution of misbranded drugs, structuring more than $100, 000 in a 12-month period, mail fraud, the commission of money laundering as well as other charges relating to the maintenance of drug-involved premises and investment of illegal drug proceeds. The indictment also included forfeiture allegations. Following a 13-day trial, the jury acquitted Peithman, AEP Properties, and Elder on some counts and convicted them on other counts. The district court sentenced Peithman to a total term of 115 months' imprisonment for the convictions at issue in this appeal[2] and a consecutive 14-month term of imprisonment for violating his conditions of supervised release. Elder was sentenced to a total term of 63 months' imprisonment.[3] AEP Properties was fined $450, 000 and ordered to pay a special assessment in the amount of $400. A joint and several money judgment in the total amount of $1, 142, 942.32 was ordered to be paid by Peithman, AEP Properties, Elder, and Cornerstone Plaza (a company Elder owned). The court imposed a fine in the amount of $500, 000 against both Peithman and Elder and ordered each to pay $5, 186.56 in restitution.

         Peithman raises two clusters of issues on appeal: (1) sufficiency of the evidence, and (2) various assertions of substantive and procedural errors. Peithman contends the evidence was insufficient to sustain a conspiracy or that illegal profits were invested. In his second barrage of claims, he argues the district court erred when it denied his motion for a new trial; when it ordered the money judgment to be joint and several and found equal culpability among the parties; when it failed to remove a juror who was ill during the trial; when it calculated the Sentencing Guidelines; and when it failed to grant a more substantial downward variance.

         Elder also raises numerous challenges. She asserts that the evidence was insufficient to sustain convictions for distributing misbranded drugs and structuring. She joins Peithman's claim that the money judgment was imposed in error, and argues the district court erred by considering acquitted conduct at sentencing, by calculating the Sentencing Guidelines range incorrectly, by refusing to allow a public authority/entrapment by estoppel defense, and by imposing a substantively unreasonable sentence. We reverse that portion of the money judgment imposed jointly and severally pursuant to 21 U.S.C. § 853 in the amount of $117, 653.57 and remand for further proceedings consistent with this opinion, but affirm the convictions and sentences in all other respects.

         I. Background

         In late 2013, law enforcement officers, acting in an undercover capacity, began buying products suspected of containing synthetic marijuana from smoke shops. Dirt Cheap and Island Smokes were two of the targeted shops where undercover buys occurred in 2014 and 2015. Allen Peithman first began operating Dirt Cheap in 2008. Dirt Cheap sold cigarettes, glass pipes, water pipes, t-shirts, e-cigarette products, "typical head shop stuff." When the store first opened, Peithman sold "K2", which is now referred to as "potpourri." Peithman explained to law enforcement that "K2" did not contain any banned chemicals, did not cause consumers any problems, and was in high demand because it did not show up on drug tests. According to Peithman, "every shop in town" began selling "K2" because the product had a very high profit.

         Peithman's operation of Dirt Cheap was interrupted when he was incarcerated on a federal firearm charge between March 2013 and June 2014. When Peithman was operating Dirt Cheap, he primarily relied on his wholesale suppliers to review the list of prohibited controlled substances and to insure that the "potpourri" complied with state and federal controlled substances laws. He informed law enforcement that the vendors constantly changed the products they sold to keep ahead of the evolving law. The "potpourri" sold at Dirt Cheap and Island Smokes was purchased primarily on the Internet with money orders. According to Peithman, the profit margins plummeted for "potpourri" sold during the last few years of his business. Nonetheless, on a "good day" Dirt Cheap made around five thousand dollars. On a "bad day" it would be a couple thousand dollars.

         During Peithman's incarceration, Dirt Cheap was operated by Elder, although Peithman retained ownership of the name Dirt Cheap. In September 2014, Elder opened her own store, Island Smokes, because Peithman did not want to sell "potpourri" at Dirt Cheap any longer. Peithman purchased the property for the new store from his uncle and leased it to his mother. After Island Smokes opened for business, Dirt Cheap ceased selling "potpourri" but continued to sell what law enforcement consider drug paraphernalia as well as other items typically sold in smoke shops. Island Smokes sold drug paraphernalia, "potpourri," and other items typically sold in smokes shops.

         Between February 2014 and August 2015, law enforcement officers conducted at least nine undercover buys. Several of the packets purchased were sent to a lab and tested positive under the United States Drug Enforcement Administration ("DEA") drug scheduling as a Schedule I controlled substance. In addition, in April 2014, law enforcement obtained a search warrant for five boxes scheduled to be delivered to Dirt Cheap based on information from a Federal Express driver that he had become ill due to an odor coming from packages. The boxes contained approximately 2, 500 various fruit-flavored packets of "K2/potpourri" in three-gram and ten-gram amounts. At that time, the packets tested negative for DEA Schedule I controlled substances.

         By September of 2014, the Lincoln police department was receiving an average of 20 to 30 calls per week about people hanging around Island Smokes and trespassing at an adjacent apartment complex. Over a four-day period in April 2015, law enforcement officers responded to at least seven medical emergencies involving "potpourri" bought at Island Smokes and smoked by the purchaser. Law enforcement encountered some of the overdose victims near Island Smokes and others they visited at the hospital.

         On April 23, 2015, law enforcement officers executed a search warrant at Island Smokes. One of the investigators noticed 100 pipes in a storage area behind the front counter, which in his experience were commonly used to smoke methamphetamine. When questioned, Elder called them "oil burners." When asked if Elder had aromatic oil to burn in the pipes, she located two small vials from behind the checkout counter. Elder reported to law enforcement that she generally kept 10 vials of oil per 100 pipes.

         Officers seized a "K2" packet and pipe discovered while searching the back garage area, which upset Elder because she believed all the "K2/potpourri" had been removed from the store. Elder told investigators during the search of her store that even though the "potpourri" packets were labeled "do not burn," she knew a majority of her customers smoked "potpourri," purportedly to relax. She also informed the investigators that her customers had requested a milder blend because her current and recent stock was too strong and they did not like the effects.

         In total, officers seized from Island Smokes more than 1, 000 assorted glass pipes, bongs, gas mask pipes, dugouts, one-hitter pipes in different colors, sizes, and styles. Cigar wrappers and rolling papers were also seized. A total of 560 packets of "potpourri" were seized. Twelve sample "potpourri" packets from the inventory were sent to a lab for testing. Four of the 12 sample "potpourri" packets contained DEA Schedule I controlled substances. In addition, Food and Drug Administration ("FDA") Special Agent Bradley Cooper opined at trial that the seized "potpourri" packets were misbranded because they did not comply with FDA labeling requirements. He testified the packets were missing instructions for proper use, adequate warnings of potential adverse side effects, a list of active ingredients, a description of the contents, and the manufacturer's name.

         On August 25, 2015, law enforcement officers executed a search warrant at Dirt Cheap. Glass pipes, bongs, hookahs, water pipes, scales, grinders, dugouts, one-hitters, plastic baggies, rolling papers, screens, other types of drug paraphernalia, and business records were seized. Law enforcement officers also obtained bank records for Peithman and Elder and their business accounts. An operations officer for West Gate Bank testified during the trial that multiple cash deposits in Peithman's Dirt Cheap business account would be made on a single day. For example, on December 19, 2013, a $5, 000 cash deposit was made at 10:12 a.m. using teller #54; a second $4, 000 cash deposit was made to the same account at 2:20 p.m. at the same branch using teller #56; and a third cash deposit of $1, 292 was made 18 minutes later to the same account at the same branch using teller #58.

         Between October 1, 2013, and May 11, 2015, a total of $1, 100, 957.65 in cash was deposited into bank accounts belonging to Peithman, Elder, Cornerstone Plaza, and AEP Properties. An expert in the field of financial investigations testified at trial about transactions indicative of structuring. He opined that the "even dollar" cash deposits made to the various accounts belonging to businesses were indicative of an intent to structure because they are inconsistent with normal business activity. He further opined that two cash deposits made on consecutive days in an amount slightly under the $10, 000 threshold daily limit might also be indicative of an intent to structure. Similarly, multiple deposits on the same day, and sometimes less than 20 minutes apart as occurred here, that totaled more than $10, 000 for the day, but individually were under the $10, 000 limit was indicative of structuring. The expert also testified that structuring could occur through multiple cash deposits on the same day at different banks in amounts less than $10, 000 to avoid depositing more than $10, 000 into any one account on a single day. According to the expert, the bank records presented at trial contained deposits indicative of structuring.

         After her arrest for charges related to this case, Elder stressed to law enforcement that she, not her son, was solely responsible for the sale of "potpourri" during and after Peithman's incarceration. Both Elder and Peithman asserted at trial that Elder "went to great lengths" and used "due diligence" to make sure the products she was selling were legal. They cited, as examples, Elder's efforts to review the chemical sheets associated with the products, her discussions with the suppliers, her attendance at conferences, her consultation with a lawyer, and her decision to keep in contact with law enforcement and follow their advice, such as when she was asked to stop selling a particular product because of the serious side effects people were experiencing.

         After what the district court described as "a long, and very well fought jury trial," the jury convicted Peithman, Elder, and AEP Properties on some counts and acquitted on others. The jury found Peithman and Elder guilty of conspiracy to distribute drug paraphernalia, conspiracy to commit mail fraud, investment of illicit drug profits, conspiracy to distribute misbranded drugs, and conspiracy to structure financial transactions. Peithman was sentenced to a period of incarceration of 115 months and Elder to a term of 63 months. The lengthier sentence for Peithman was due primarily to his criminal history. Both sentences were at the high end of the applicable advisory Sentencing Guidelines range as calculated by the court.

         The government sought forfeiture of specific property owned by Peithman, Elder, and their companies. Both parties agreed to submit the issue of which property should be forfeited to the jury. The jury agreed that the packets of "potpourri" and related drug paraphernalia together with one bank account were subject to forfeiture. The jury was unable to reach a unanimous agreement on other specific items and found other items should not be forfeited. The items the jury did not forfeit or could not agree should be forfeited were the most valuable items of specific property.

         The government also sought a money judgment as part of the forfeiture allegations pertaining to the drug paraphernalia conviction, the mail fraud conviction, and the structuring conviction. That issue was decided by the court. The government requested a money judgment in the amount of $2, 248, 728.56. After conducting a hearing on the issue, the court found, by a preponderance of the evidence, the appropriate money judgment was in the amount of $1, 142, 942.32, which "represent[ed] the wholesale costs of acquiring the drug paraphernalia and potpourri, the sale of which generated the structuring." The court specifically rejected the "proceeds theory" and was cautious to take steps to ensure double-counting did not occur. This timely appeal followed.

         Peithman has raised eight issues on appeal, challenging decisions made post-trial. Elder has raised ten issues, challenging decisions made during the trial and post-trial. We have carefully considered each of their arguments and in this opinion group related claims.

         II. Discussion

         1. Peithman's 18 U.S.C. § 3147 Conviction

         18 U.S.C. § 3147 increases the punishment for an offense committed while on pretrial release. It is indisputable that the jury should not have been asked to determine Count XIV-that is, whether Peithman committed an offense under 18 U.S.C. § 3147. Years ago, this Court held that § 3147 provides for an enhancement of a sentence, not a separate offense to be found by a jury. United States v. Feldhacker, 849 F.2d 293, 299 (8th Cir. 1988). The district court acknowledged the error and took responsibility for it. The court vacated the conviction (Count XIV) before sentencing.

         Peithman asked for a remedy beyond vacating the conviction. He moved for a new trial, arguing the entire trial was tainted by permitting evidence of his prior conviction and conditions of supervised release because Count XIV was submitted to the jury. The court denied the new trial motion on the ground that the interviews Peithman and Elder provided to law enforcement would have been admitted into evidence regardless of Count XIV and no "conceivable prejudice" could exist since there were 18 references during Peithman's interview and five references during Elder's interview to the fact that Peithman had been in prison, was on supervised release, and was staying out to the smoke shop business to avoid trouble with his probation officer.

         During the new trial motion and now on appeal, the parties characterize Peithman's defense theory as one in which Peithman was not involved in unlawful activity during the times alleged in the indictment because he was in jail during a majority of that time and that following his release he consciously avoided the business due to his supervised release conditions. Peithman argues on appeal that he is entitled to a new trial because this defense was thrust upon him when the government wrongfully charged him under 18 U.S.C. § 3147 and then compounded the error by introducing evidence that: (1) he had an unidentified prior federal conviction; (2) he was placed in the ...

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