| People v Barone |
| 2012 NY Slip Op 09143 [101 AD3d 585] |
| December 27, 2012 |
| Appellate Division, First Department |
| The People of the State of New York,Respondent, v Vincent Barone, Appellant. The People of the State of New York,Respondent, v V. Reddy Kancharla, Appellant. |
—[*1] Stillman, Friedman & Shechtman, P.C., New York (Paul Shechtman of counsel), for V.Reddy Kancharla, appellant. Cyrus R. Vance, Jr., District Attorney, New York (Amyjane Rettew of counsel), forrespondent.
Judgment, Supreme Court, New York County (Edward J. McLaughlin, J.), rendered April 7,2010, convicting defendant Vincent Barone, after a jury trial, of enterprise corruption, attemptedgrand larceny in the third degree, two counts of scheme to defraud in the first degree and ninecounts of offering a false instrument for filing in the first degree, and sentencing him to anaggregate term of 5
We exercise our discretion in the interest of justice to modify defendants' sentences so thatthe sentences for the remaining counts run concurrently. Pursuant to CPL 470.15 (6) (b), thisCourt has "broad, plenary power to modify a sentence that is unduly harsh or severe under thecircumstances," even with respect to an otherwise legal sentence (see People v Delgado,80 NY2d 780, 783 [1992]). This power may be exercised in the interest of justice and withoutdeference to the sentencing court (id.). Where the court deems an otherwise legalsentence to be excessive, it may "substitute [its] own discretion even where a trial court has notabused its discretion" (People vEdwards, 37 AD3d 289, 290 [1st Dept 2007], lv denied 9 NY3d 843 [2007],citing People v Rosenthal, 305 AD2d 327, 329 [1st Dept 2003]).
In this case, the trial court sentenced Barone to an aggregate term of 5
Thus, the trial court meted out the sentences in a manner such that even if the enterprisecorruption convictions were vacated, the defendants would still serve equivalent aggregate terms.As defendants point out, the trial court apparently felt that such sentences were warranted inorder to "send a message" to " 'the construction industry in New York City [which] over thedecades has been rife with corruption.' "
In light of our decision to vacate the enterprise corruption convictions, we find that theimposition of consecutive sentences is unduly harsh. "[F]airness of the criminal justice systemrequires . . . some measure of equality in the sentences meted out to defendants whocommit the same or similar crimes" (seePeople v Schonfeld, 68 AD3d 449, 450 [1st Dept 2009] [internal quotation marksomitted]; People v Andrews, 176 AD2d 530 [1st Dept 1991], lv denied 79 NY2d918 [1992] [although defendant was properly sentenced to greater term than those imposed uponcodefendants who pleaded guilty, the concept of proportionality of punishment warranted areduction of his sentence]; People v Slobodan, 67 AD2d 630, 630 [1st Dept 1979][sentence reduced where the difference between defendant's sentence and those of hiscodefendants who did not go to trial was "so great as to raise serious questions as to whether(defendant was) not being penalized for going to trial"]).
Here, in return for his cooperation with the prosecution, codefendant Thumma, who affixedhis engineer's stamp to hundreds of mix design reports, received a misdemeanor conviction and aprobationary sentence and will likely retain his engineering license. Similarly, codefendant Porterpleaded guilty to a single felony count and was sentenced to probation. The defendants'consecutive sentences for the same or similar crimes, all non-violent class E felonies, arestrikingly disproportionate and should be reduced in the interest of justice.
Catterson, J.P., Richter, Abdus-Salaam and [*3]Román, JJ., concur in part in Part I of a separatememorandum by Catterson, J.P.; Catterson, J.P., dissents in part in Part II of a separatememorandum as follows:Part I
In this case involving alleged falsified test and inspection reports for landmark projects in theNew York City metropolitan area, we find that defendants' convictions for enterprise corruptionwere not supported by legally sufficient evidence and were against the weight of the evidence.Relying on pure conjecture bolstered by empty rhetoric, the People failed to produce anyevidence that either defendant knew that test results and inspection reports were fabricated, muchless that the defendants spearheaded a criminal enterprise.
The record reflects that in 1995, defendant V. Reddy Kancharla joined Testwell Craig, aconstruction material testing company, as its laboratory director. Kancharla acquired thecompany three years later, renaming it Testwell Laboratories, Inc. (hereinafter referred to asTestwell). Testwell was considered the preeminent material testing laboratory in the New Yorkarea. Both public and private builders relied on its test reports and certifications about thestrength of concrete and the quality of steel in structures built in the city.
In October 2008, a New York County grand jury returned an indictment against Testwell, itsowner and chief executive officer Kancharla, its vice-president of engineering, defendant VincentBarone, and several other employees, charging various crimes including enterprise corruption,scheme to defraud and offering a false instrument for filing. The crimes were based on fiveseparate criminal schemes. At issue in this appeal are three schemes involving concrete and steeltesting of major, high-profile projects including Yankee Stadium, the Freedom Tower, and JetBlue facilities at JFK Airport.
Kancharla was charged in connection with the "mix design scheme," the "steel inspectionsscheme" and the "certified inspectors" scheme, but not in the "field tests scheme" or the"compressive/flexural strength alternations scheme." Barone was charged only in the "steelinspections scheme" and "compressive/flexural strength alternations scheme."
In the "mix design scheme" the People alleged that Testwell, rather than utilizing the"preliminary tests method," one of three methods authorized by the New York City BuildingCode (Administrative Code of City of NY, tit 28, ch 7) to calculate the strength of concreteneeded for a project, created a formula believed to meet project specifications, and then used acomputer program to generate expected compressive strength tests. Thus, the mix design reportswere the product of a computer algorithm, not actual testing. The People contended thatKancharla stamped and signed the improperly-prepared "mix design" reports and urgedTestwell's laboratory director, Dr. Kaspal Thumma, to do the same.
In the "compressive/flexural strength alterations scheme" the People alleged that compressivestrength test results were altered by Testwell employees before the results were sent out forreview, and that Barone authorized changes to certain test results related to one project throughfaxes sent from his assistant. The People's theory was that the altered test results were designedto eliminate anomalous outcomes so that the projects' engineers would not question the [*4]results. At trial, the prosecution relied on testimony from AnaMurthy, an employee in the concrete department, and on documents seized from Testwell'soffices to identify who altered test results.
The "steel inspections scheme" charges arose from steel inspections performed by twoTestwell inspectors in 2007 for the Dormitory Authority of New York at a South Carolina steelfabrication plant. The People alleged that Testwell double-billed for the inspectors' work.
Kancharla was convicted of all the mix design counts and one of the 22 "steel inspectionsscheme" charges, and was acquitted of the "certified inspectors scheme" charge. He was alsoconvicted of being the leader of the "Testwell Group," which was allegedly a criminal enterprise.Barone was convicted of five counts in the "compressive/flexural strength alterations scheme"and seven counts in connection with the "steel inspections scheme." He was also convicted ofenterprise corruption.
In our view, the evidence necessary to establish the elements of enterprise corruption waswholly missing from the People's proof. Indeed, the entire theory of the People's case is made ofconjecture, surmise and innuendo rather than proof beyond a reasonable doubt. A person is guiltyof enterprise corruption when that individual is employed by or associated with a criminalenterprise and intentionally participates in the affairs of that enterprise by engaging in a pattern ofcriminal activity involving at least three criminal acts. (Penal Law § 460.20 [1], [2]; seePeople v Besser, 96 NY2d 136 [2001]; People v Western Express Intl., Inc., 85 AD3d 1 [1st Dept 2011],revd 19 NY3d 652 [2012].)
In Besser, the Court of Appeals held that "Penal Law § 460.20 was plainlyintended to reach conduct that was not already subject to criminal prosecution (see, BillJacket, L 1985, ch 516). The emphasis of the legislation was not on the quantity or nature of themyriad, isolated criminal activities underlying the new offense—conduct adequatelyaddressed elsewhere in the Penal Law. Instead, it 'focuse[d] upon criminal enterprises becausetheir sophistication and organization make them more effective at their criminal purposes andbecause their structure and insulation protect their leadership from detection and prosecution'(Penal Law § 460.00). Thus, the purpose of creating the separate crime was to addressthe particular and cumulative harm posed by persons who band together in complex criminalorganizations." (96 NY2d at 142 [emphasis added].)
A "criminal enterprise" has also been defined as "a group of persons sharing a commonpurpose of engaging in criminal conduct, associated in an ascertainable structure distinct from apattern of criminal activity, and with a continuity of existence, structure and criminal purposebeyond the scope of individual criminal incidents." (Penal Law § 460.10 [3]; seeWestern Express, 85 AD3d at 6-7; People v Yarmy, 171 Misc 2d 13, 16-17 [Sup Ct,NY County 1996].) Thus, a criminal enterprise consists of three elements: (i) a common purpose;(ii) an ascertainable structure distinct from a pattern of criminal activity; and (iii) a continuity ofexistence, structure and criminal purpose. (See Western Express, 85 AD3d at 7.)
In Western Express, a majority of this Court upheld the enterprise corruption countson the ground that the defendants "transform[ed] what had been [a] legitimate business into a hub[*5]for criminal activity geared toward maximizing. . . profits from the theft and use of stolen credit card information." (85 AD3d at13.) The Court of Appeals recently reversed, finding that "[t]here [was] no hint that [theparticipants] . . . were somehow connected to the workings of a structured,purposeful criminal organization." (19 NY3d at 659.)
The Western Express decision is particularly instructive in that it reiterates that thePeople must prove that there is a "common purpose" and an "ascertainable" hierarchicalstructure. The Court of Appeals, quoting the dissent at this Court, specifically noted that althoughthere was a pattern of illegal activity, there was no " 'evidence of any collective decision-makingor coordination with respect to the purported enterprise's activities or of any overarchingstructure of authority or hierarchy in which defendants participated.' " (19 NY3d at 657, quoting85 AD3d at 19 [Andrias, J., dissenting].) The Court concluded that the enterprise corruptionindictments should have been dismissed because there could be no reasonable inference of an"enduring structurally distinct symbiotically related criminal entity with which [defendants] werepurposefully associated." (19 NY3d at 660.)
Other decisions on continuing criminal enterprise similarly rely on evidence of a defendant'spurposeful participation in a distinct hierarchy. In People v Forson (NYLJ, May 12, 1994at 29, col 3 [Sup Ct, NY County 1994]), the defendants formed a business, Oxford CapitalSecurities, that "stole vast sums" of money "through a variety of fraudulent [securities schemes]."The testimony showed that "Forson was at the top of the hierarchy and directed the entirecriminal enterprise"—that he set the goals, policies, and strategies for Oxford—andthat other defendants formed an "inner circle" to "execute his directives and to relay them tothose below in the enterprise." (Id.) In People v D.H. Blair & Co., Inc. (2002 NYSlip Op 50152[U], *22-23 [Sup Ct, NY County 2002]), the defendants operated a securities"boiler room" through a "hierarchical structure" with "the top of the structure planning theobjectives of the enterprise and directing how the objectives would be achieved, and the middleand bottom levels engaging in activities to carry out the scheme." In People v Pustilnik(14 Misc 3d 1237[A], 2007 NY Slip Op 50407[U] [Sup Ct, NY County 2007]), the indictmentalleged a criminal enterprise bent on defrauding no-fault insurance carriers, with Pustilnik andhis mother "at the top of the structure . . . establish[ing], plann[ing] and direct[ing]the accomplishments of its illegal goals" and others "carrying out [their] criminal plan." (2007NY Slip Op 50407[U], *6.) Finally, in People v Marquez (NYLJ, July 22, 1996 at 25, col6 [Sup Ct, NY County 1996]), Raymond Marquez "controlled and managed a sophisticatedgambling syndicate," supervising approximately 100 employees. Marquez was "[a]t the top of thehierarchy"; his associates called him "Boss"; "[o]n a continuing basis he set the goals, policiesand strategies of the organization"; and the operation of each gambling spot was "centralizedunder his direction."
Here, as in Western Express, there is "no proof of concerted activity from which apetit jury might reasonably have gathered that the appellants were knowing participants in theaffairs of a 'criminal enterprise.' " (19 NY3d at 660.) Defendant Kancharla asserts, and weconcur, that the People failed to introduce any evidence that Kancharla knew that anyone atTestwell altered the results from the compressive tests or that the field test results from theYankee Stadium project were fabricated. Similarly, the People failed to introduce evidence thatKancharla knew that there was any problem with the inspection reports for the John Jay project[*6]or that the certifications submitted to the School ConstructionAuthority were inaccurate. There is also no evidence that Kancharla discussed any alleged illegalactivity with anyone at Testwell but for an extremely brief exchange sometime in 2004 withThumma concerning the mix design reports. Absent this proof, the enterprise corruption countscannot stand.
It appears that the People relied on two witnesses to make out the charge of enterprisecorruption: Thumma and Karen Connelly. Connelly testified about Testwell's website andnewsletters. This testimony was seemingly introduced to show Testwell's corporate hierarchy.Thumma effectively negated Connelly's testimony when he testified that the website was "totallyout of date." Moreover, Thumma's testimony is far more important for what it did not say. WhileThumma stated that there were regular meetings of Testwell's management, Thumma did nottestify that at any meeting at Testwell there was any discussion related to any of the schemesdescribed above.
The People offered no proof that Kancharla, Barone, or Testwell encouraged or expandedany criminal transactions. They adduced no proof that anyone encouraged "more and largercriminal transactions." Simply put, the People failed to introduce any evidence of a leadershipstructure, overall planning of the criminal enterprise, or any communications between Kancharla,Barone, and any of the Testwell employees in furtherance of the criminal enterprise as requiredby the precedent cited above. Astoundingly, there was no testimony that any employee ofTestwell ever spoke with Kancharla or Barone about the different crimes other than the onetangential conversation that Kancharla had with Thumma.
In the People's brief on appeal and at oral argument, the People offered a series of whollyunsupported arguments and significant misrepresentations of the record to sidestep the absenceof proof on the criminal enterprise issue. The People contended that Testwell's "computerprogramming, the vagueness about [its] corporate titles and responsibilities, [and its] carefulcrafting of correspondence . . . are signs of an enterprise that has banded together toensure that [its] crimes [would be] undetected."
The People repeatedly pointed to Testwell's computer system, stating that Kancharla"personally installed [a] 'state of the art' computer system" that "was programmed to support andhelp hide the data-tampering fraud." The People failed to provide any record citation either intheir brief on appeal or when pressed at oral argument for what defendant correctly characterizesas an outlandish claim. While there was testimony that Testwell's computer system did not allowone to determine who had altered data, there was no evidence of any kind that the computersystem was purposefully programmed to "hide" data tampering or that Kancharla had any role inthe programming.
We agree with Kancharla that it is one thing to draw inferences from the facts and anotherthing for the People to simply invent facts in an attempt to satisfy the Western Expressstandard. The only testimony on Kancharla's involvement with Testwell's computer system is asfollows:
"Q: And were there other system upgrades to the computers while Mr. Kancharla owned thecompany?
"[Thumma]: I mean the computer system itself has grown from a simple recording ofdispatch data and test data to making things more automatic in terms of generating reports,generating reports, sending them and sorting them and also ability to email them.[*7]
"Q: So all these developments happened under Mr.Kancharla's ownership?
"[Thumma]: Yes."
The People also assert that Testwell's corporate titles and responsibilities were kept vague to"camouflage [its] crimes and blur responsibility for them." The People contend that EdwardPorter's title "was published on Testwell's website as assistant laboratory manager despite the factthat he had nothing to do with the lab." However, the People put forth no evidence thatany engineer doing business with Testwell was deceived by Porter's title or that anyone evenconsidered the issue. In any event, the record does demonstrate that Porter worked withTestwell's laboratory whenever he prepared trial mixes.
Finally, the People claim that "Testwell's correspondence was larded with the Testwell'we'—a usage that allowed top-tier members like Kancharla and Barone to appear to betaking a personal hand at resolving a client's 'issues' even while they laid the foundation for alater claim that they bore no responsibility for the falsehoods festooning their correspondence."Once again, the People offer no record citation for this claim.
All of these specious claims are made to bolster the People's theory on appeal that the "'common purpose' behind many of [Testwell's] crimes was to cover up the shoddy quality ofTestwell's understaffed . . . and often unqualified field inspectors and therebyprotect the millions of dollars Testwell brought in from these operations on even a singleproject." That contention is simply unsupportable by any fair view of the evidence of record.
The only evidence that Testwell's inspectors were "unqualified" was the fact that two of itsemployees worked for the School Construction Authority without the proper certificates forone day each. Thus, the People's use of "often unqualified field inspectors" is a hyperbolicargument, once again, calculated to convey to this Court that the Western Expressstandard has been met by proof in this case. This empty rhetoric is further refuted by the scale ofTestwell's legitimate business when compared with the alleged profits from the various schemes.Testwell's total revenue in 2008 was approximately $20 million. Even were we to accepteverything the prosecution contends as true, the revenue from criminal conduct in 2008 did notexceed $100,000, or .5%.
John Klein of Silverstein Developers gave a fairer assessment of Testwell's work. When theprosecutor asked him how Testwell's concrete inspectors had performed on the River Place IIproject, he said this: "They did a very good job. I had inspectors there, I never had to call to askfor inspectors to show up. The inspectors were always there on time. I never had to wait for aninspector to pour cylinder. [Mr. Kancharla] did a great job."
The dissent on the finding that the defendants' convictions for enterprise corruption were notsupported by legally sufficient evidence and were against the weight of evidence (hereinafterreferred to as dissent), contends that "it is frequently the case that legitimate corporations may'both len[d] their corporate form, hierarchy and operations to criminal enterprises which flourish[] within their corporate structure.' " (People v Joseph Stevens & Co., Inc., 31 Misc 3d1223[A], [*8]2011 NY Slip Op 50808[U], *40 [Sup Ct, NYCounty 2011].) While that may be correct as a legal aphorism, it certainly is no substitute forproof beyond a reasonable doubt. As detailed above, there simply was no such proof in thePeople's case, unlike the facts of Joseph Stevens & Co. In that case, the People sought toprosecute a broker-dealer firm that was accused of bilking 800 clients out of over $6 million inunauthorized commissions through 5,000 trades. Unlike the paucity of proof in this case, inJoseph Stevens & Co., the People established that the company created a series of stocks,manipulated the trades, and sought solely to profit on the commissions at their own clients'expense. All of the traders were part of the company-wide scheme to manipulate the market andthe trading to maximize the commissions to the company.
The dissent's recitation of the evidence against Kancharla is also insufficient. Other thanKancharla's single conversation with Thumma described above, no evidence was put forward thatKancharla instructed anyone at Testwell to: alter any compressive test results, alter or fabricatefield test results on the Yankee Stadium project, fabricate or falsify steel inspection reports on theJohn Jay project, or indeed commit any crime whatsoever. Furthermore, the dissent provides norecord citation to prove any of these supposed criminal acts perpetrated by Kancharla.
Similarly, there is no proof of record that Barone altered any test results. The People's ownforensic investigation, relied upon by the dissent, established that Barone did not even haveaccess privileges for the data at issue. Therefore, the dissent is left with relying on the testimonyof Ms. Murthy about how she was instructed to alter test data. However, the Murthy testimonydoes not support the People's position.
Murthy testified that she altered data on the concrete tests at Caruso's behest and the Peoplesubmitted numerous emails that corroborated that testimony. Murthy never spoke with Kancharlaabout the data alterations. The only testimony linking Barone to Caruso's extensive alteration wasas follows:
"ADA: So when Mr. Caruso was gone, Mr. Barone would review and employ a similarprocedure like you talked about with Mr. Caruso?
"Murthy: Not too many times, but I don't remember, but that was the procedure that wasfollowed.
"ADA: Okay. So other than sort of having the supervisor check the low breaks andmake a decision, did you receive any instructions from Mr. Barone about changingnumbers.
"Murthy: I would receive fax from the Queens office." (Emphasis added.)
The People's position with regard to Barone did not improve with additional questioning.Ms. Murthy later testified that she changed test results for Caruso but she only changed data forBarone after receiving faxes for the Jet Blue project:
"ADA: And why did you make these changes, why did you change test data?
"Murthy: Because my manager instructed me to do that.
"ADA: And why didn't you question him?
"Murthy: Testwell is a reputable company, they're in the business for a long time and mymanagers were professional engineers and I trusted them.
"ADA: And when you say your managers, who are you referring to?
"Murthy: Mr. Caruso and through the faxes Mr. Barone" (emphasis added).
Despite the purported clarification, the People in summation paraphrased Murthy'sambiguous testimony and overstated its meaning: "Don't take my word for it, ask for Murthy'sread back, she said it. She said Vincent Barone would check and authorize changes when AlfredoCaruso was not available."
It appears that the dissent has adopted the People's argument in summation and on appeal.But rather than limiting the People's position to the Jet Blue counts in the indictment, the dissentimplies that it is evidence of a continuing criminal enterprise. Even if we were to accept that ahandful of faxes concerning the alteration of data is sufficient to sustain a charge against Barone,it is wholly deficient as proof against Kancharla or Testwell. We reiterate that no witnesstestified that Kancharla ever discussed these faxes with Barone or Caruso or that Kancharla evenknew about the practice.Part II
I must respectfully dissent from that part of the majority opinion that upholds the remainingconvictions (Manzanet-Daniels, J., joined by Richter, Abdus-Salaam and Román, JJ.). Inmy view, the trial court made significant errors in evidentiary rulings which tainted the entireproceeding before the jury. Because these rulings, along with the People's unsupported (and nowvacated) enterprise corruption counts, deprived the defendants of a fair trial, I would remand fora new trial on the remaining counts in the indictment.[FN*]
It is important to recognize that the enterprise corruption counts allowed the People to joinfive separate criminal schemes into one prosecution. Kancharla was not charged in two of theschemes and venue in one of them was in New York County only as a pattern act. Similarly,Barone was not charged in all of the separate criminal schemes such as the mix design and fieldtest schemes.
The prosecution relied heavily on Testwell being a criminal enterprise. The People told thejury that "fraud [was] thoroughly entrenched at Testwell"; that "fraud became the master plan";that at Testwell "it was fraud as a deliberate business strategy"; that "every engineer abides by[the City Code] . . . except the ones at Testwell"; that "at Testwell a PE's licensewas . . . [*9]a license to steal"; and that "[t]hesecrimes work together [and] ha[ve] a cadence . . . and they all conform to a pattern ofcriminal activity."
This use of Testwell as a criminal enterprise allowed the People to link for the jury all of theindividual defendants to crimes with which they were not charged. In summation, the Peoplestated that "[t]he details of this scheme were delegated by Reddy Kancharla to his top lieutenants,Vincent Barone, and Alfredo Caruso who in turn enlisted others to help them. This scheme ispart of the way they covered up the false mix design reports and the incompetent and skippedfield testing in the first two catch points."
Similarly, "[n]ot only a new crime in and of itself, but part of the cover up, a way of beingresponsive without being truthful, a way of wriggling out of difficulty instead of comingclean. . . .
"Look at all the engineers that stamp things that they knew were not true: Kaspal Thumma,Michael Sterlacci, Nancy Phillips, Vincent Barone, and Reddy Kancharla in two states and it'snot as if these mix design reports were meaningless pieces of paper that were thrown into a filesomewhere. It's not as if Reddy Kancharla didn't know where these reports would go or what theywould be used for. Reddy Kancharla knew exactly where they went.
"Remember, as I just mentioned, he held the concrete license, he was the face of Testwell, hedealt with clients like Jack Klein."
The Second Department's recent decision in People v Colletti (73 AD3d 1203 [2d Dept 2010], lv denied15 NY3d 772 [2010]) is instructive in this regard. In Colletti, the indictment charged thedefendant with, inter alia, participating in the Genovese-Bonanno gambling organization.However, at trial the prosecution repeatedly referred to the Colletti gambling organization. TheSecond Department reversed and vacated the conviction on the criminal enterprise counts, citingUnited States v Weissman (899 F2d 1111 [11th Cir 1990]) for the proposition that thedefendant was indicted for associating with one criminal enterprise but the proof at trialrepeatedly and impermissibly referred to the defendant's association with a different criminalenterprise. However, the Court then reversed the conviction on the remaining counts as well:"[S]ince the various offenses of which the defendant was convicted are factually intertwined witheach other, and the references to organized crime and to the activities of various crime familiespervade the record, reversal and a new trial as to all of the counts is appropriate." (73 AD3d at1207-1208.)[*10]
In my opinion, any viable defenses that Kancharla andBarone had to the crimes that they were actually charged with were consumed by the visionconjured by the People of Testwell as a continuing criminal enterprise.
I would also find that the trial court made two evidentiary rulings that were in error andgreatly prejudiced Kancharla's defense. To demonstrate that he had no intent to defraud in themix design scheme counts, Kancharla sought to explain to the jury that it had become an industrypractice to create mix designs that did not adhere to the Building Code's preliminary testsmethod.
To that end, prior to the start of trial, Kancharla moved to introduce proof that numerousother testing laboratories employed the same approach as Testwell in their preparation of mixdesign reports. Kancharla argued that evidence of his good faith lay in showing that Testwell wasusing the same approach as its competitors, namely they reported estimated "breaks" not actualones. The motion set out to establish that at least eight companies followed such an approach.
However, the trial court excluded the evidence on the grounds that "on the issue of intent. . . the fact that Kancharla knew the other companies were preparing [reports] inthe same manner [is] irrelevant." On appeal, the People amplify this holding by arguing that thisevidence showed only that the companies were "guilty of the same form of fraud." The trialcourt's ruling was, in my opinion, a grievous error that a majority of this Court does not evenaddress.
It is well established that scienter is an element of a scheme to defraud. (People vKorsen, 167 AD2d 180 [1st Dept 1990], lv denied 77 NY2d 962 [1991].) Further, asKancharla correctly asserts, relying on People v Kisina (14 NY3d 153, 160 [2010]), it is well settled that adefendant should be permitted to offer any evidence which bears directly on his intention todefraud.
Indeed, numerous courts have permitted defendants to introduce evidence of industrypractice to show a lack of criminal intent. (See e.g. Newton v Merrill, Lynch, Pierce, Fenner& Smith, Inc., 135 F3d 266, 273 [3d Cir 1998], cert denied 525 US 811 [1998][evidence of industry practice "could, of course, be regarded by a trier of fact as probative of thedefendants' state of mind"]; United States v Seelig, 622 F2d 207, 216 [6th Cir 1980],cert denied 449 US 869 [1980] [evidence of routine procedures of pharmacists shouldhave been admitted on issue of good faith]; United States v Riley, 550 F2d 233, 236 [5thCir 1977] ["(w)hile a general practice is not an absolute defense to criminality we think the wiser. . . approach is to let the jury consider the practice in determining whether (thedefendant) intended to . . . defraud"].)
In this case, the harm from the ruling was compounded by the testimony of Thumma,Testwell's laboratory director who was called by the prosecution as a cooperating witness. Thejury specifically asked to hear the transcript of Kancharla's reply to Thumma about computergenerated results being a standard industry practice. Without any other evidence, the jury couldhave inferred that the reference to "industry practice" was a lie intended to induce Thumma to goalong with the practice. Hence, a fact that Kancharla sought to establish as true became evidencefor the prosecution, and defendant had no opportunity to counter that impression.
The trial court also excluded evidence showing that the concrete contractors who purchasedthe mix design reports were well aware that Testwell was not following the [*11]preliminary tests method. Kancharla sought to introduce evidencethat concrete contractors regularly requested that Testwell produce mix design reports in a fewdays' time, thus acknowledging that the preliminary tests method was not being followed.
The People argue that because the contractors were a couple of steps removed from theirvictims, the contractors' knowledge of the fraudulent nature of the reports had no bearing onwhether the victims were duped. The court excluded the evidence on the ground that the concretecontractors were "unindicted coconspirators." I agree with defendants that in so doing the courtcommitted reversible error. Again, a majority of this Court ignores this issue.
The evidence was offered to show that Testwell was not hiding the fact that the reportedbreaks were estimated rather than actual, thus showing open conduct rather than fraud and deceit.Rather than allow the jury to hear the evidence and give it appropriate weight, the trial court tookjudicial notice that a whole segment of the construction industry was an accessory to crime. Inmy view, this was an impermissible finding. (See Barker & Alexander, Evidence in NewYork State and Federal Courts § 2.2 [5 West's NY Prac Series] ["(t)he doctrine of judicialnotice . . . is based on the principle that some matters of fact are so generally wellestablished in the world outside the courtroom that the taking of evidence would be unnecessaryand inefficient"].) Consequently, I would reverse and remand for a new trial.
Richter, Abdus-Salaam, Manzanet-Daniels and Román, JJ., concur in part in Part I ofa separate memorandum by Manzanet-Daniels, J.; Manzanet-Daniels, J., dissents in part in Part IIof a separate memorandum as follows:Part I
Kancharla challenges the sufficiency of the evidence supporting his conviction of the countspertaining to the falsified mix design reports. With respect to the first-degree scheme to defraudcount, it is true that Testwell was paid by the concrete suppliers, who would have been aware thatno testing was being performed. Testwell was not directly paid by the victims, who were thedevelopers funding the projects. Nevertheless, the evidence supported the conclusion that thevictims' money indirectly would be used by the concrete supplier to pay for the testing, since thecost of the testing would be built into the concrete supplier's contract, along with its otherexpenses. Thus, the evidence established that defendants obtained at least $1,000 from one ormore of the victims of the scheme (see Penal Law § 190.65 [1] [b]).
Kancharla raises issues regarding the geographical jurisdiction of New York County withrespect to the offering a false instrument for filing counts. There was evidence that copies of themix design reports were distributed to the developer, the architect, the construction manager andthe engineer of record, and that the Port Authority, which had its main office in New YorkCounty, acted as the regulatory agency for all projects on its property, and received all regulatoryfilings. This was sufficient to prove venue in New York County by a preponderance of theevidence (see People v Ribowsky, 77 NY2d 284, 291-292 [1991]). However, theevidence failed to establish, with respect to the fraudulent reports filed with the MetropolitanTransportation Authority pertaining to a bus depot project, that the reports had been filed in NewYork County. Accordingly, Kancharla is entitled to vacatur of his convictions on counts 12 and13 as originally numbered in the indictment.
We reject Barone's challenges to the sufficiency and weight of the evidence supporting hisconvictions pertaining to the compression/flexural strength alteration scheme. Baroneacknowledged that codefendant Caruso directed Testwell's personnel to flag failing test results,and that the data entry staff and codefendant Caruso routinely tampered with lab data to falsifytest results so that concrete that failed to meet the requisite threshold would appear to satisfy the[*12]engineer's specifications. The testimony of one of Testwell'sdata entry employees, stating that Barone filled in when Caruso was absent and that theemployees reported to him "the same way," was sufficient to establish Barone's participation inCaruso's scheme.
In addition, faxes from Barone's Queens office with data alternations sent several times aweek proved that Barone also altered the data. While Barone claims that those faxes neveraltered a failing result to a passing one, many of those changes either raised a result below thethreshold to a number above it, or made alterations that brought the results much closer to apassing mark, although still technically failing. Thus, Barone's alterations to the data left enoughanomalies to make the data realistic, since the complete absence of any problematicresults would have been highly suspicious to a professional engineer.
We reject all of defendants' arguments relating to the fact that they were convicted of somecounts and acquitted of others. There is nothing in any of the acquittals that would undermine thesufficiency or weight of the evidence supporting the convictions (see People v Rayam, 94NY2d 557 [2000]).
The court properly exercised its discretion in excluding, as irrelevant, certain evidenceoffered by defendants (see Crane v Kentucky, 476 US 683, 689-690 [1986]). The factthat concrete suppliers may have been aware that mix design reports had been generated withoutsufficient time having passed to do the requisite testing was not relevant with regard to the issueof whether the victims, i.e., the builders, architects, engineers, and regulators, had been defraudedby Testwell's false reports.[FN1]
Similarly, the court properly excluded evidence that other materials testing laboratories usedthe same practice of providing estimated breaks in mix design reports. Evidence of an industrycustom involving criminality cannot justify a criminal act (see Smith v United States, 188F2d 969, 970 [9th Cir 1951]). The evidence is in any event irrelevant insofar as it tended to showthat other testing companies cheated in the same manner as Testwell, but did not prove whetheror not the victimized builders and regulators had been defrauded by the practice.
Defendants did not preserve their claims that the court's interjections deprived them of a fairtrial (see People v Charleston, 56 NY2d 886, 888 [1982]), and we decline to review themin the interest of justice. As an alternative holding, we find no basis for reversal. While the courtmade a few isolated remarks that were inappropriate, they were not unduly prejudicial, and thecourt instructed the jury to disregard what it had said.
The court properly directed Kancharla to pay reparations in the amount of $225,000(see Penal Law § 60.27 [1]). Kancharla's crimes at the mix design stage set inmotion the chain of results that ultimately required the retesting, and it is not necessary that hisconduct was not the sole cause, as long as his actions were a sufficiently direct cause of theensuing harm (see People vDaCosta, 6 NY3d 181, 184 [2006]).Part II[*13]
I believe that the evidence at trial more than sufficientlyestablished the enterprise corruption counts as to defendants Kancharla and Barone. Theevidence at trial showed a pervasive scheme involving systematic falsification of concrete datatesting at many levels of the company, and defendants' participation in the manipulation of thedata. I would therefore affirm their convictions on those counts.
Defendant Kancharla was the owner and chief executive officer of Testwell Laboratories,Inc. Defendant Barone was Testwell's vice-president of engineering. These defendants, severalother employees and Testwell itself were charged with a series of crimes based on severalseparate criminal schemes involving concrete and steel testing for major development projects,including the Freedom Tower, Yankee Stadium and the Jet Blue facilities at JFK Airport.
The "mix design" scheme involved Testwell's mix design reports which purported to measurethe respective strength of four proposed mixes of concrete at 7, 14 and 28 days applyingcompression strength tests. Instead, the mix design reports at issue were prepared usingcomputer-generated numbers without any actual testing.
The "compressive/flexural strength alterations scheme" pertained to the requirement that thestrength of the concrete actually used on a project be tested by a laboratory. Alfredo Caruso is acodefendant whose case was severed from that of these defendants. Caruso, the head ofTestwell's concrete department, allegedly instructed employees to flag low test results for hisreview, after which Caruso directed employees to insert a different number to alter the results.Barone was charged with participating in Caruso's scheme.
The "steel inspections scheme" alleged that Testwell double-billed for the work of twoTestwell steel inspectors who worked on projects for Tishman Construction and SilversteinDevelopers at the same time as the project for the Dormitory Authority of New York.
In my view, the evidence amply supported the enterprise corruption counts againstdefendants Barone and Kancharla. As relevant here, a person is guilty of enterprise corruptionwhen he or she "is employed by or associated with a criminal enterprise and intentionallyparticipates in the affairs of that enterprise by engaging in a pattern of criminal activity involvingat least three criminal acts" (People v Besser, 96 NY2d 136, 142 [2001]; Penal Law§ 460.20 [1], [2]). A "criminal enterprise" is defined as "a group of persons sharing acommon purpose of engaging in criminal conduct, associated in an ascertainable structuredistinct from a pattern of criminal activity, and with a continuity of existence, structure andcriminal purpose beyond the scope of individual criminal incidents" (Penal Law § 460.10[3]). Thus, "a criminal enterprise consists of three elements: (i) a common purpose, (ii) anascertainable structure distinct from a pattern of criminal activity, and (iii) continuity ofexistence, structure, and criminal purpose" (see People v Pustilnik, 14 Misc 3d 1237[A],2007 NY Slip Op 50407[U], *5 [Sup Ct, NY County 2007]). The first and third elements areeasily satisfied in this case, since realizing an economic benefit was the common purpose, andthere was extensive continuity.
With respect to the element of an ascertainable structure distinct from a pattern of criminalactivity, the criminal enterprise must be more than, and distinct from, "any ad hoc associationentered into for the purpose of carrying out one or more of the criminal incidents relied upon toestablish its existence" (People v Cantarella, 160 Misc 2d 8, 14 [1993]).
The majority on this point asserts that the People failed to introduce any evidence of aleadership structure or overall planning of the criminal enterprise. Yet, as the People argued attrial, the structure of defendants' enterprise was largely based on the corporate structure of [*14]Testwell Laboratories, as is often true of defendants operatingwithin the structure of a legitimate enterprise in order to conceal their crimes (see e.g. Peoplev Pustilnik [enterprise assumed form of legitimate professional corporations used toperpetrate fraudulent insurance billing scheme]). The presence of a discernible organizationalstructure distinguishes this case from People v Western Express Intl., Inc. (85 AD3d 1 [1st Dept 2011]),in which I was in the dissent in finding insufficient proof of enterprise liability, and which wasrecently reversed by the Court of Appeals (19 NY3d 652 [2012]), on those grounds. InWestern Express, involving the traffic of stolen credit card data via Internet sites, therewere various individuals and organizations, each operating independently and with nooverarching structure or system of authority. In this case, there is a discernible organizationalstructure, indeed a traditional hierarchical structure, in which persons at all levels of thecorporation participated in the systematic falsification of concrete testing data.
The majority argues, in a related vein, that the scale of Testwell's legitimate business refutesthe proof of enterprise corruption, noting that only a small percentage of Testwell's profits wereascribable to the alleged criminal activities. However, it is frequently the case that legitimatecorporations may "both len[d] their corporate form, hierarchy and operations to criminalenterprises which flourish[ ] within their corporate structure" (People v Joseph Stevens &Co., Inc., 31 Misc 3d 1223[A], 2011 NY Slip Op 50808[U],*40 [2011]).
The Governor's Memorandum approving the statute notes that relieving the People of theobligation to prove a distinction between the criminal enterprise and a legitimate one to which itmay be connected "accomplishes two important results. First, it makes clear that groups that haveboth legitimate and illegitimate purposes, like a social club that 'fronts' for a criminal gang, or apawn shop that is the center of a fencing operation, can constitute criminal enterprises. Second, itpermits the hierarchy of and positions within a legitimate enterprise—for example, a laborunion, trade association or government agency—to contribute to the structure of a criminalgroup existing and operating within that legitimate enterprise." (Governor's Mem approving L1986, ch 516, 1986 McKinney's Session Laws of NY at 3177.)
Given that persons at all levels of the company participated in a series of continuing fraudsand falsifications of data, and the manner in which one type of fraudulent activity was necessaryto cover up another set of frauds, it would be reasonable to conclude that there existed astructured criminal enterprise "that enabled its members to repeatedly commit the pattern ofcriminal activity alleged in the indictment" (Pustilnik, 2007 NY Slip Op 50407[U], *7).Kancharla's mix design scheme allowed the company to generate almost pure profit by charging$300 to $500 for a seemingly legitimate, but worthless, certification. Rather than testing thestrength of the concrete at the required intervals, Testwell used computer algorithms to predictexpected results, turning around reports in under a week.[FN2][*15]
Barone hid flaws in the concrete and in Testwell's fieldinspection process by altering lab results to conform to expectations. The evidence showed thatCaruso and his team routinely altered results when they fell below the engineer's requirements,ensuring that no one would question the authenticity of the reports.
Testwell's computer system was programmed to erase the identity of any user makingchanges to test data, and further, to alert the user when results had already been reported to theclient, a safeguard against the generation of contradictory reports.[FN3]
This is not a case where disparate crimes have been "stitched together" simply because theperpetrators all worked for the same company. It is evident from the pattern of criminal activitythat all of Testwell's crimes were committed as part of a single enterprise, intent on increasingTestwell's profits.
The fact that defendants were not personally charged in connection with every one ofTestwell's schemes or convicted of every count in which they were charged does not mean thatthey were in the dark about the criminal enterprise. There is no requirement that an enterprisemember participate in, or be aware of, all of its crimes; provided the member is aware of thebasic structure and purpose of the enterprise, and participates in the enterprise by committing therequisite number of criminal acts, he or she may be held criminally liable. Although, forexample, Barone may not have been charged in the mix design scheme, the evidence showed thathe knew about the scheme. Indeed, there would have been no reason for Barone to tamper withlab data to hide "low breaks" if the company had performed mix design testing as it should have.Similarly, although Kancharla may not have personally tampered with lab data, he relied on hisstaff to do so in order to cover up the mix design scheme.
Thumma, the director of laboratory testing, described the mix design scheme and the [*16]roles employees played in furtherance of the scheme.[FN4]Thumma reported to Kancharla, who was in charge of all technical operations and wasresponsible for the accreditation program. Thumma testified concerning the mix design software,which would generate results based on computer algorithms, rather than actual testing at therequired intervals. These mix design reports were initially signed and certified by Kancharlahimself, and later by Sterlacci and Thumma. At the time Thumma assumed this responsibility, hehad a conversation with Kancharla concerning the mechanics of generating the reports.Kancharla assured him that the manner in which Testwell generated the mix design reports wasstandard practice in the industry and "there couldn't be any problem using these reports andsigning them." Thumma testified that Kancharla also signed and stamped blank mix designreports.
Murthy provided equivalent evidence regarding the roles Barone, Caruso, Shah, Promushkinand others played in the test-alteration scheme. Murthy, who was responsible for inputting datafrom field reports, and matching the field data with results subsequently generated by thelaboratory, testified that she was instructed once or twice a week to alter inputs so as to achieve atarget number. She testified that she would "play around with" the compressive strength numberso as to achieve the result requested by Caruso, her direct supervisor. She testified that Carusowould "circle the number, and then give—put in a number, we would put in anothernumber." When Caruso was absent, Barone assumed his duties. In addition, Murthy's office,which was responsible for data input, received faxes from Barone directing them to alter certainlab results. Murthy testified that when she input the requested data, the normal practice was toshred the faxes.
Forensic experts evaluating Testwell's computer systems found evidence both of systematicalteration of test data and systematic efforts to cover up falsified results, including software thaterased proof of the identity of the user who had altered any particular test result, and systemwarnings that would appear if staff attempted to change a result that had already been reported tothe client. The evidence, in its totality, was more than sufficient to establish enterprise corruption(see e.g. Western Express, 85 AD3d at 9-10 [existence of Internet crime schemeestablished through evidence, inter alia, that site selling stolen credit card numbers helped itscustomers evade detection by law enforcement]). I would accordingly uphold [*17]defendants Kancharla and Barone's convictions on the enterprisecorruption counts.
Footnote *: Although in my opinion a newtrial should be held, lacking a majority of the Court for that position, I am constrained to agree inthe modification of the sentences.
Footnote 1: Notably, where such documentswere relevant with respect to a particular witness's credibility or to show the victim's knowledge,the court permitted the defense to introduce such exhibits.
Footnote 2: These reports were furnished toconcrete suppliers, who in turn would deal with the project developers, the victims of the schemeto defraud. Thus, it cannot be assumed that the victims must have known about the falsificationof results due to the quick turnaround of the reports.
Footnote 3: The People's computer forensicexperts testified at length concerning how management at Testwell had manipulated testing data.Comparing data from subsequent backups to the bar code for a given project, they were able toascertain that load and stress data had been altered on a regular basis. Reviewing emails on thecompany's hard drives, they found instructions to alter data such as "fix low breaks." They alsoreviewed hard copies of faxes with requests for changes, such as Barone's instructions on the JetBlue project, and using the project bar codes found evidence that the data on those projects hadbeen altered on the system. The People's expert further found evidence of attempts to cover upwhat was going on, such as emails from Caruso "not [t]o request in writing to fix low breaks."The People's expert's analysis found that data had been altered approximately 3,260 times onover 100 projects.
Footnote 4: Thumma also pleaded guilty tofiling false mix design reports.