United States v. Kyle Grasso
724 F.3d 1077, 2013 WL 3854655, 2013 U.S. App. LEXIS 15285 (2013)
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Rule of Law:
Under the pre-2009 federal money laundering statute, payments to a co-conspirator for providing a service essential to an underlying fraud scheme do not merge with the underlying offense and can be separately prosecuted as money laundering if the payments are not a central component of the scheme and the money laundering charge does not create a radical increase in the statutory maximum sentence.
Facts:
- Mark Abrams and Charles Fitzgerald orchestrated a mortgage fraud scheme by purchasing homes and then obtaining loans for falsely inflated values, pocketing the difference.
- They recruited Kyle Grasso, a successful real estate agent who had an ownership interest in a title company, Cal Title.
- In 2000, Grasso personally participated in the scheme to purchase a home for himself, submitting loan applications that falsely stated the purchase price was $995,000 when it was actually $890,000.
- Grasso assisted the conspiracy in other transactions by using his access to the Multiple Listing Service (MLS) to change property listings to reflect fraudulently inflated prices.
- The conspirators began using Grasso's company, Cal Title, to prepare two sets of title insurance policies: one with the true price for the seller and another with the inflated price for the lender.
- When other title companies refused to work with the conspirators, they began using Cal Title exclusively.
- Grasso demanded that Abrams and Fitzgerald pay him and his partner a commission on any transaction involving Cal Title, even if they were not the real estate agents on the deal.
- In 2002, Abrams paid Grasso's company over $50,000 in 'referral fees' for two transactions where Cal Title was used but Grasso was not the agent; these payments were made after the fraudulent loan proceeds were received.
Procedural Posture:
- In August 2007, a federal grand jury indicted Kyle Grasso on one count of conspiracy, one count of bank fraud, seventeen counts of loan fraud, and three counts of money laundering.
- The case was tried before a jury in the U.S. District Court for the Central District of California.
- The jury returned a guilty verdict against Grasso on the conspiracy, bank fraud, and money laundering charges, as well as on loan fraud charges related to four specific property transactions.
- Grasso filed a motion for acquittal or, in the alternative, for a new trial, arguing the evidence was insufficient to support the convictions.
- The district court denied Grasso's motions and sentenced him to twelve months and one day in prison.
- Grasso (appellant) appealed the district court's denial of his motion for acquittal to the U.S. Court of Appeals for the Ninth Circuit, with the United States as the appellee.
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Issue:
Under the pre-2009 money laundering statute, do payments made to a co-conspirator for access to an essential service in a mortgage fraud scheme constitute separately punishable 'proceeds' of that fraud, or do they merge with the underlying bank fraud offense as an essential expense?
Opinions:
Majority - Ikuta, Circuit Judge
No. Payments made to a co-conspirator for access to an essential service in a mortgage fraud scheme constitute separately punishable 'proceeds' and do not merge with the underlying offense. The court affirmed Grasso's convictions, holding that the 'referral fees' he received did not create a merger problem under the Supreme Court's decision in United States v. Santos. Applying a three-factor test, the court reasoned that: 1) the two kickback payments were not a 'central component' of the overall scheme, which involved 80 transactions over three years and operated for years without such payments; 2) the money laundering conviction did not cause a 'radical increase' in the statutory maximum sentence, as the underlying bank fraud carried a 30-year maximum and money laundering carried a 20-year maximum; and 3) circuit precedent establishes that kickbacks and transfers to co-conspirators in fraud schemes are considered 'proceeds' (i.e., gross receipts) for money laundering purposes. The court also found sufficient evidence for Grasso's conspiracy and fraud convictions based on his knowledgeable participation, including his personal fraudulent loan application, manipulation of MLS data, and awareness of the use of straw buyers and Cal Title's dual-document role.
Concurring-in-part-and-dissenting-in-part - Berzon, Circuit Judge
Yes. The payments merge with the underlying bank fraud offense because they were essential expenses of the scheme. Judge Berzon dissented from the majority's money laundering analysis, arguing that the convictions should be reversed. The reasoning is that the payments to Grasso were not merely profits, but essential operating expenses required to continue the fraud. After other title companies refused to participate, Cal Title became indispensable to the scheme, and Grasso forbade its use unless he was paid a commission. Therefore, paying him was a necessary cost of doing business for the conspirators. This creates a classic 'merger problem' under Santos and Ninth Circuit precedent like United States v. Van Alstyne, which the majority misapplied. The majority's reliance on the kickbacks not being 'central' and the lack of a 'radical' sentence increase is unpersuasive and inconsistent with prior circuit rulings.
Analysis:
This case refines the Ninth Circuit's application of the 'merger doctrine' from United States v. Santos for money laundering charges predating the 2009 statutory amendments. The court's three-factor test solidifies a narrow interpretation of what constitutes an 'essential expense' that merges with an underlying offense. By distinguishing Grasso's 'referral fees' from the core operational payments of a Ponzi scheme, the decision makes it easier for prosecutors to bring separate money laundering charges against co-conspirators who receive payments or kickbacks for their role in a larger fraud. The ruling reinforces that unless a payment is a truly central and indispensable component of the underlying crime's design, it can be treated as laundering the 'proceeds' of that crime.
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