MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant Pedro Bello's motion to dismiss [DN 68]; Defendant Juan Hernandez's motion to dismiss [DN 76]; and Defendant Juan Hernandez's motion to adopt Co-Defendant's motion to dismiss [DN 77]. A hearing was held April 24, 2013. Fully briefed, these matters are ripe for decision.
Defendants Pedro Bello, Caridad Bello and Juan Hernandez were indicted on October 3, 2012 on five counts. The Superseding Indictment [DN 35], in Count 1, alleges that between April 5, 2007 and December 1, 2009, Defendants conspired to commit wire fraud in violation of 18 U.S.C. §§ 1343 and 1349. The United States contends that the purpose of the conspiracy was a scheme to defraud the Commonwealth of Kentucky of excise tax revenues through the use of a tobacco diversion invoicing scheme. According to the Superseding Indictment, the Defendants created the impression that a tobacco distributor company was purchasing cigarettes from GT Northeast of St. Louis, a non-licensed, out of state company that was operated by Defendants Caridad Bello and Juan Hernandez. In actuality, the tobacco distributor company's cigarette orders were being filled by GT Northeast located in Sellersburg, Indiana, and later Louisville, Kentucky, a Kentucky excise tax licensee, operated by Pedro Bello. Count 1 charges that the scheme permitted Defendant Pedro Bello to avoid paying approximately $2,000,000 in Kentucky excise taxes on the purchase of cigarettes valued at approximately $12,500,000.
Counts 2 through 5 of the Superseding Indictment charge the Defendants with money laundering, in violation of 18 U.S.C. § 1956(a)(1)(B)(i). In connection with the conspiracy to commit wire fraud, the United States alleges that the Defendants conducted four wire transfers of funds from GT Northeast of St. Louis bank accounts to GT Northeast bank accounts.
Defendant Pedro Bello has filed a motion to dismiss arguing that the Superseding Indictment fails to allege a violation of an underlying state or federal law, and therefore the conspiracy to commit wire fraud and money laundering claims must fail. Defendant Juan Hernandez has also filed a motion to dismiss the Superseding Indictment for selective prosecution and vindictive prosecution. Defendant Hernandez has filed a motion to adopt Defendant Pedro Bello's motion to dismiss.
A. Motion to Dismiss for Failure to Allege an Underlying State or Federal Law
Defendant Pedro Bello argues that the United States has failed to make clear what Kentucky or federal law the theory of conspiracy to commit wirefraud and money laundering is based on. Because there is no underlying criminal activity, Defendant Pedro Bello reasons there is no basis for either charge. He acknowledges that Kentucky cigarette excise tax laws are located in KRS § 138, but no reference is made to either Kentucky law or the Federal Contraband Cigarette Trafficking Act. Additionally, Defendant Pedro Bello is concerned about the federal-state balance at issue stating that Kentucky has regulated the sale and taxation of tobacco and has not made Defendant Pedro Bello's alleged practice unlawful, and the United States should not intervene in Kentucky's regulatory scheme.
In response, the United States argues that a separate state or federal violation of law is not required to prove wire fraud and conspiracy to commit wire fraud. The government states that a wire fraud charge requires it prove three elements: "(1) a scheme or artifice to defraud; (2) use of interstate wire communications in furtherance of the scheme; and (3) intent to deprive a victim of money or property." United States v. Daniels, 329 F.3d 480, 485 (6th Cir. 2003). The United States contends that the language of 18 U.S.C. § 1343 does not require a separate violation of state or federal law. (U.S.' Response to Pedro Bello's Mot. to Dismiss, 5-6 [DN 81] (citing United States v. Green, 592 F.3d 1057 (9th Cir. 2010); United States v. Frost, 321 F.3d 738 (8th Cir. 2003); United States v. Scallion, 533 F.2d 903 (5th Cir. 1976))). According to the United States, the Superseding Indictment alleges each of the three elements: the Defendants conspired to defraud Kentucky of tax revenue from cigarettes through an invoicing scheme using wire communications. It states that "[t]he Supreme Court has specifically held that a government's right to collect excise taxes constitutes property under wire fraud." (Id. at 8 [DN 81] (citing Pasquantino v. United States, 544 U.S. 349 (2005))). During oral argument, the government cited to Kentucky statute's definition of contraband cigarettes, which are "any untax-paid cigarettes held, owned, possessed, or in control of any person . . . are contraband and subject to seizure and forfeiture." KRS § 138.165(1). As to the money laundering charges, the United States agrees that a money laundering charge requires a specified unlawful activity, and states that the conspiracy to commit wire fraud is the unlawful activity.
Under 18 U.S.C. § 1343, wire fraud is described as:
[H]aving devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice[.]
As the parties pointed out, the government must prove three elements: "(1) a scheme or artifice to defraud; (2) use of interstate wire communications in furtherance of the scheme; and (3) intent to deprive a victim of money or property." Daniels, 329 F.3d at 485. "A scheme to defraud includes any plan or course of action by which someone uses false, deceptive, or fraudulent pretenses, representations, or promises to deprive someone else of money." U.S. v. Jamieson, 427 F.3d 394, 402 (6th Cir. 2005).
Defendant Pedro Bello's main argument is that there is no evidence to support the third element, an intent to deprive a victim of money or property. Defendant Bello argues that he has not broken any state law, there is no excise tax due and thus, he has not deprived the Commonwealth of Kentucky any property. KRS 138.146(2) requires the payment of tax to be affixed to each cigarette package by a nonresident wholesaler prior to the introduction or importation of the cigarettes into Kentucky. Bello argues that GT St. Louis, a nonresident wholesaler took "title" to the cigarettes, but never took physical possession of them. Because the cigarettes physically remained in Kentucky, GT Northeast of St. Louis, never "introduced" or "imported" the cigarettes into Kentucky and thus, the obligation to purchase tax stamps never was triggered.
The Court disagrees. The statutory scheme seems clear that excise taxes are due on cigarettes once those cigarettes come into the state. As the government stated during oral argument, KRS 138.165 provides that all untax-paid cigarettes held, owned or controlled by any person are contraband. Under Kentucky state law, as soon as a wholesaler receives the cigarettes, he is to purchase stamps within forty-eight hours. KRS 138.146(2). There is no dispute that GT Northeast did not purchase the stamps. It appears to the Court, as alleged in the indictment, that the whole purpose of transferring "title" to GT St. Louis was a scheme designed to avoid the payment of excise tax on the sale of cigarettes located in Kentucky. At oral argument, Defendant Bello argued that his transporters license somehow exempted him from the excise tax requirement, but there is no evidence that the ...