USA v. Stewart et al

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Case No. 1:21-cr-00034-WJM Document 161 __ filed 02/09/24 USDC Colorado pgil
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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martinez
Criminal Case No. 21-cr-034-W] M
UNITED STATES OF AMERICA,

Plamnntff,

ee

MICHAEL SHAWN STEWART, and
2. BRYANT EDWIN SEWALL,

Defendants.

ORDER ON DEFENDANT’S MOTION FOR JAMES HEARING

The Govemment charges Defendants Michael Shawn Stewart and Bryant Edwin
Sewall with fourteen counts of wire fraud, in violation of 18 U.S.C. § 1343, and one
count of conspiracy to commit wire fraud, in violation of 18 U.S.C. § 371. (ECF No. 1.)

Currently before the Court is Defendants’ Motion for Determination of
801(d)(2)(E) Evidence and Request fora James Hearing (ECF No. 113), in which they
seek a pretnal ruling on whether alleged co-conspirator statements satisfy Federal Rule
of Evidence 801(d)(2)(E) and may therefore be introduced against them at tnal for the

truth of the matters asserted.' The Court presumes familiarity with the facts of this

' The practice sumounding Rule 801(d)(2)(E) embodies what is commonly referred to as
a James determination, which gets its name from United States v. James, where the Fifth
Circuit held that a declaration by one defendant is admissible against other defendants only
when there is a “sufficient showing, by independent evidence, of a conspiracy among one or
more other defendants and the declarant and if the declarations at issue were in furtherance of
that conspiracy.” 590 F.2d 575, 581 (5th Cir. 1979). The Court at times continues to employ
the James temninology in this Order, in accordance with common practice. But, ultimately,
admissibility of the co-conspirator statements is govemed by Rule 801(d)(2)(E).

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case.
Per the undersigned’s usual practice, the Government was ordered to respond to
Defendant’s motion with a detailed written proffer of co-conspirator statements it intends
to introduce for the truth of the matters asserted. (ECF Nos. 126, 126-1.) The
Government submitted a proffer containing 229 statements. (Id.) Defendants
responded with arguments opposing the statements’ admissibility. (ECF Nos. 134, 134-
1.)
For the reasons explained below, Defendants’ objections are sustained in part
and overruled in part.
I. NO HEARING NECESSARY
A district court can “only admit co-conspirator statements if it holds a James
hearing or conditions admission on forthcoming proof of a predicate conspiracy through
trial testimony or other evidence.” United States v. Townley, 472 F.3d 1267, 1273 (10th
Cir. 2007) (internal quotation marks omitted). Therefore, although a hearing is not
required, the Tenth Circuit has expressed a “strong preference” for pretrial James
proceedings. Id. The reason for this preference is that if a court provisionally admits a
statement with the caveat that the Government “connect up” the statement to sufficient
evidence of a predicate conspiracy at trial, the risk of prejudice to a defendant is high
should the Government later fail to meet its burden. United States v. Urena, 27 F.3d
1487, 1491 (10th Cir. 1994). Nevertheless, whether to hold a James hearing rests
within the Court’s discretion. Id.
The Court has reviewed the briefing on this issue and determined that a hearing
is not necessary to resolve the admissibility of the Government’s proposed co-
conspirator statements. The Court therefore decides the matter on the briefing
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submitted by the parties.
II. LEGAL STANDARD
Rule 801(d)(2)(E) provides that a statement is “not hearsay” if it “is offered
against an opposing party” and it “was made by the party’s coconspirator during and in
furtherance of the conspiracy.” The Court may not admit such a statement under this
Rule without being satisfied by a preponderance of the evidence that (1) “there was a
conspiracy”; (2) the conspiracy “involv[ed] the declarant and the nonoffering party”; and
(3) “the statement was made during the course and in furtherance of the conspiracy.”
Bourjaily v. United States, 483 U.S. 171, 175–76 (1987) (internal quotation marks
omitted).
Whether this standard is satisfied is a “preliminary question about whether . . .
evidence is admissible,” meaning the Court “is not bound by evidence rules, except
those on privilege,” when resolving the question. Fed. R. Evid. 104(a); Bourjaily, 483
U.S. at 178–79. Thus, the challenged statements themselves may be a part of the
preponderance of evidence supporting admissibility under Rule 801(d)(2)(E). See
Bourjaily, 483 U.S. at 180 (“[T]here is little doubt that a co-conspirator’s statements
could themselves be probative of the existence of a conspiracy and the participation of
both the defendant and the declarant in the conspiracy.”); see also United States v.
Lopez-Gutierrez, 83 F.3d 1235, 1242 (10th Cir. 1996) (“In making its preliminary factual
determination as to whether a conspiracy exists, the court may consider the hearsay
statement sought to be admitted . . . .”).
However, the Tenth Circuit requires “some independent evidence linking the
defendant to the conspiracy,” meaning “evidence other than the proffered [co-
conspirator] statements themselves.” Id. (alteration in original) (internal quotation marks
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omitted); see also United States v. Rascon, 8 F.3d 1537, 1541 (10th Cir. 1993) (“[M]ost
courts require some reliable corroborating evidence apart from the [co-conspirator’s]
statements before those statements may be used.”). The required quantum of
independent evidence may exist “even when it is not ‘substantial.’” Lopez-Gutierrez, 83
F.3d at 1242 (quoting Rascon, 8 F.3d at 1541).
Assuming the Government establishes the existence of conspiracy in which the
declarant and the defendant participated, the final question is whether any proffered
statements were made by a declarant-conspirator “during and in furtherance of the
conspiracy.” Fed. R. Evid. 801(d)(2)(E). “A wide array of statements can fit this
requirement,” United States v. Alcorta, 853 F.3d 1123, 1137 (10th Cir. 2017), assuming
the statements were made “before the objectives of the conspiracy have either failed or
been achieved,” United States v. Owens, 70 F.3d 1118, 1126 (10th Cir. 1995) (internal
quotation marks omitted); see also Krulewitch v. United States, 336 U.S. 440, 442–43
(1949) (holding that a declaration made after the conspiracy’s “objectives either had
failed or had been achieved” was inadmissible because it was not made pursuant to
and in furtherance of the conspiracy).
Examples of statements which may be found to satisfy the
“in furtherance” requirement include statements made to
induce enlistment or further participation in the group’s
activities; statements made to prompt further action on the
part of conspirators; statements made to reassure members
of a conspiracy’s continued existence; statements made to
allay a co-conspirator’s fears; and statements made to keep
co-conspirators abreast of an ongoing conspiracy’s activities.
United States v. Perez, 989 F.2d 1574, 1578 (10th Cir. 1993) (en banc) (internal block
quote formatting omitted). On the other hand, “statements are not in furtherance of the
conspiracy if they are mere narratives, that is statements relating to past events, even
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those connected with the operation of the conspiracy where the statement serves no
immediate or future conspiratorial purpose.” Id. at 1578 (internal quotation marks
omitted).
The Tenth Circuit calls for “a construction of the ‘in furtherance’ requirement
protective of defendants,” and applies the test “narrowly.” Id. The focus is “on the
declarant’s intent in making the statement,” rather than on the statement’s effect. Id.
However, “[n]o talismanic formula exists for ascertaining whether a particular statement
was intended by the declarant to further the conspiracy and is therefore admissible in
accordance with the agency theory of conspiracy. To the contrary, this determination
must be made by examining the context in which the challenged statement was made.”
Id. at 1578–79.
III. ANALYSIS
A. Existence and Scope of Conspiracy
To prove that a conspiracy existed, the Government must show: (1) two or more
persons agreed to violate the law; (2) the defendants knew the essential objectives of
the conspiracy; (3) the defendants knowingly and voluntarily participated in the
conspiracy; and (4) the alleged co-conspirators were interdependent. United States v.
Small, 423 F.3d 1164, 1182 (10th Cir. 2005). To prove knowledge of the essential
objectives of a conspiracy, the Government does not have to show the alleged co-
conspirators knew all the details or all the members of a conspiracy. Id. “Rather, the
government only needs to demonstrate the defendant shared a common purpose or
design with his alleged co-conspirators.” United States v. Yehling, 456 F.3d 1236, 1240
(10th Cir. 2006). A conspiracy may be inferred from circumstantial evidence. United
States. v. Bucaro, 801 F.2d 1230, 1232 (10th Cir. 1986).
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At the outset, the Court must clarify whether the Government has presented
“evidence [of the conspiracy] other than the proffered [co-conspirator] statements
themselves.” Lopez-Gutierrez, 83 F.3d at 1242. The Government marshals the
following evidence in support of the existence of a conspiracy: (1) Stewart’s loss of
nearly $500,000 of investment money prior to the recruitment of Sewall, which was
apparently not disclosed to investors; (2) Mediatrix’s assessment of “performance fees”
on purportedly successful trades that were not actually successful; (3) the creation of
“Blue Isle Markets” as a middleman charging additional brokerage fees; (4) and the
progressive growth of Mediatrix’s undisclosed trading deficit (i.e., the “hole”), which
Defendants avoided disclosing to investors by only reporting closed trades while leaving
large losing trades open until they could be offset by winners. (ECF No. 126 at 1–7.)
Defendants argue that they had a legitimate business that eventually struggled
due to arbitrary restrictions imposed by their broker, Equiti, which interfered with their
otherwise successful trading strategy. (See generally ECF No. 134.) They point out
that preparing marketing materials, raising money, charging fees, and communicating
with a broker are legitimate business activities for foreign exchange market (“FOREX”)
traders; and they assert that communications between themselves bemoaning their
business partner Michael Young’s refusal to stick to tasks assigned to his role within
Mediatrix are innocuous. (See generally ECF No. 134-1.)
After careful consideration of the parties’ briefs and the proffered statements, the
Court concludes that the Government has proved the existence of a conspiracy whose
purpose and scope was to charge customers unearned fees based on manipulated and
incomplete trading data and to conceal this duplicity from investors and potential
investors via misleading marketing materials and account statements. That much of
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Defendants’ conduct and many of the proffered statements would be unremarkable in
the context of a legitimate business does nothing to detract from this conclusion. The
Government’s theory, which it supports amply for purposes of Rule 801(d)(2)(E), is that
Mediatrix and Blue Isle were the vehicles for Defendants’ fraud. As discussed below,
conduct to advance those companies’ business interests may, in certain circumstances,
be considered in furtherance of the alleged conspiracy.
B. Statements Made During and in Furtherance of the Conspiracy
Defendants argue that even if a conspiracy existed, the proffered statements
were not in furtherance of it for numerous reasons. (ECF No. 134 at 11–20.) Instead,
they argue the statements are “cherry-picked” from “hundreds of thousands of emails” in
order to mischaracterize Defendants’ statements. (Id.) They divide the statements into
seven categories and explain how such statements do not further the alleged
conspiracy: statements regarding routine business practices (“Category I”); statements
regarding routine technical trading information (“Category II”); statements about
professional and personal history (“Category III”); statements with third parties regarding
routine account management (“Category IV”); statements in marketing materials and
newsletters (“Category V”); statements regarding Divisa/Equiti errors (“Category VI”);
statements regarding roles within the business (“Category VIII”). (Id.)
In the Government’s view, Mediatrix and Blue Isle were the core of Defendants’
conspiracy, and functioned as the vehicles they used for siphoning their client’s money
while masking the fact that their trading was in fact losing money. (ECF No. 126 at 7–
21.) Thus, the Court concludes that statements between those entities or to others that
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advanced those companies’ ability to charge fees to enrich Defendants,2 furthered their
conspiratorial cause. (See id. at 23–25.) Likewise, statements that conceal or prolong
the concealment of the conspiracy from non-conspirator Michael Young, Equiti
representatives, or clients are also in furtherance of the conspiracy. (See id.)
The Government’s position has considerable merit. The Court concludes that
numerous proffered statements that might be innocuous in other circumstances were
made in furtherance of Defendants’ alleged conspiracy. And because Defendants make
no argument concerning the alleged conspiracy’s duration other than contesting its
existence at all, this conclusion results in those statements’ admissibility for the truth of
the matters asserted.
Given the exceptional number of proffered statements, the Court lists below
those statements that DO NOT meet Rule 801(d)(2)(E)’s requirements and are NOT
admissible under the provisions of that rule.3 All other proffered statements are
admissible at trial:
Beginning Page # (ECF No. 134-1) Proffered Statement #
1 1, 2
6 8, 9, 10
11 15
13 20
2 For example, statements intended to recruit new investors or retain old ones furthered
the conspiracy by providing clients for Defendants to charge unwarranted fees. And statements
intended to lift or raise trading limits furthered the conspiracy by making it easier for Defendants
to hide the “hole” by keeping losing trades open without impacting other trading activity.
3 This ruling does not preclude the possible admission of any of these proffered
statements under the provisions of another rule of evidence.
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21,23
15
24, 25
17
32
18
33, 34
19
37
22
43
28
52
31
57,58,59
32
60,61
33
64
35
68
46
84,85
51
94,95
55
103
57
110
60
112
62
129
63
130
64
133
66
138
72
153
90
198
94
204, 205, 206
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IV. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
1. Defendants’ Motion for Determination of 801(d)(2)(E) Evidence and Request for
a James Hearing (ECF No. 113) is DENIED to the extent they request an
evidentiary hearing and GRANTED to the extent they request a pretrial
evaluation of the Government’s statements proffered under Rule 801(d)(2)(E);
and
2. Defendants’ specific objections are SUSTAINED IN PART and OVERRULED IN
PART as described above.
Dated this 9th day of February, 2024.
BY THE COURT:
______________________
William J. Martínez
Senior United States District Judge
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