In 2010, Stein sentenced Coplan to three years in prison, Nissenbaum to 30 months, Shapiro to 28 months and Vaughn to 20 months. The appeals of the four men, plus Bolton, were heard by the Second Circuit on Nov. 14, 2011.
Cabranes in his opinion explained that the core of the government's case at trial was to prove a "Klein conspiracy" under 18 U.S.C. §371 after United States v. Klein, 247 F.2d 908 (2d Cir. 1957), with the objects of the conspiracy to defraud the United States, evade taxes and make false statements.
In order to prove a "Klein conspiracy," he said, prosecutors must show a defendant entered into an agreement to obstruct a lawful function of government by deceitful or dishonest means and have committed at least one overt act to further that conspiracy.
The defendants tried to challenge the validity of the Klein doctrine on appeal and, citing Skilling v. United States, 130 S.Ct. 2896 (2010), urged the circuit to "pare" the body of §371 precedent "down to its core."
But Cabranes, while noting "infirmities in the history and deployment" of the statute that has been criticized for having too broad a reach, said it was for the U.S. Supreme Court, and not the Second Circuit, to change the status quo, for it is "now well-established that the term 'defraud'" reaches any conspiracy whose aim is to impair, obstruct or defeat the lawful functioning of any department of government.
'Probably' Isn't Enough
Where Nissenbaum and Shapiro prevailed, however, was on their challenge to the sufficiency of the evidence before Stein as to each of the three objects of the conspiracy.
The "centerpiece" of the case against Shapiro, a tax lawyer of nearly four decades experience, Cabranes said, was that he coached fellow partner Thomas Dougherty to lie to the IRS and come up with non-tax explanations for one of the shelters, COBRA.
But "crucially," Cabranes said, Dougherty testified at trial that Shapiro himself "believed [COBRA] worked under the law."
Cabranes then found that the evidence was insufficient against Shapiro as to the tax evasion and false statements to the IRS objects of the conspiracy.
He said the conspiracy count required proof that Shapiro joined the conspiracy with the "specific intent" to violate the law but the evidence, even viewed in a light most favorable to the government, "remains, at best, in equipoise."
Citing Sullivan v. Louisiana, 508 U.S. 275 (1993), Cabranes said it isn't enough for a jury to determine that a defendant is "probably guilty."