Opinion
00-CR-116S(Sr)
July 25, 2001
REPORT, RECOMMENDATION AND ORDER
Pursuant to 28 U.S.C. § 636(b)(1), all pretrial matters in this case have been referred to the undersigned by the Honorable William M. Skretny.
PRELIMINARY STATEMENT
The defendant has filed a motion to suppress evidence based on a claim of a Fourth Amendment to the United States Constitution violation or, in the alternative, a motion seeking a hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978) for purposes of determining the validity of the warrant issued herein. The defendant has also filed an omnibus discovery motion, but for reasons hereinafter stated, no action with respect to said motion will be taken at this time.
Oral argument was heard by this Court on defendant's motion to suppress and, in the alternative, for a Franks hearing, and thereafter it was determined that there was a sufficient legal basis for holding a Franks hearing and one was scheduled for March 7, 2001 pursuant to this Court's Decision and Order dated February 15, 2001. On March 6, 2001, counsel for the government made a motion requesting that the scheduled Franks hearing be adjourned.
At oral argument, the government conceded that certain statements made in the subject search warrant affidavit by the IRS agent were false and (without admitting that they were intentionally or recklessly false) should be excised from the warrant affidavit ("DelValle affidavit"). However, the government's position is that the information attributable to CI #1 in the DelValle affidavit was truthful and, standing alone, provided sufficient probable cause for the warrant. The parties agreed that, based on the government's admissions, there was no further need for a Franks hearing and that further legal briefing on the suppression motion was appropriate. Legal briefs were filed by the parties, and the following represents this Court's determination on the issues relating to defendant's motion to suppress and its recommendation to the District Court Judge assigned to this case.
DISCUSSION AND ANALYSIS
The defendant is charged with tax fraud in a four count indictment alleging that he made false and fraudulent statements in violation of 26 U.S.C. § 7206(1) relative to his business operations. A criminal investigation was commenced by the Internal Revenue Service ("IRS") Criminal Investigation Division ("CID") on April 27, 1997 as a result of an "unsolicited visit by two Confidential Informants to the Office of the IRS-CID." These two informants, designated as CI #1 and CI #2, met with IRS Agent DelValle on April 27, 1997 and CI #1, now identified as Clorey DiPiazza, and hereinafter referred to as "DiPiazza," turned over an original "Receipt Book" for the period of September 1989 through May 1993 which she claimed represented a "second set of books" kept by the defendant with respect to his business. She also provided copies of selected pages from a second "Receipt Book" for the period of May 1993 through May 1996. The "Receipt Book" entries consisted of four (4) columns which DiPiazza claimed depicted a column for unreported income, a column for reported income, a column for date of sales receipts and a column for number of customers per day and the average customer sale for that day. CI #2, a close friend of DiPiazza, allegedly corroborated or confirmed the information supplied by DiPiazza.
Thereafter, Agent DelValle obtained the defendant's tax returns for the years 1993 through 1996 by administrative subpoena and made a comparison of the gross receipts figure set forth on each tax return with the gross receipts figure calculated by him by using the "Receipt Books" figures for those same years. Agent DelValle concluded that the comparative results of these figures constituted probable cause that the defendant was cheating on his tax returns, and he applied for the search warrant in question. Except for an apparent reconnaissance of the defendant's business premises and the tax return comparisons as aforesaid, no other steps were taken by Agent DelValle or anyone else on behalf of the IRS to corroborate the unsolicited information supplied by DiPiazza and CI #2 before applying for the search warrant in question.
In its memorandum of law in opposition to the defendant's motion to suppress, the government argues that the "totality of circumstances" is the test to be applied, citing Illinois v. Gates, 462 U.S. 213 (1983). This is absolutely correct, but it is this very principle that causes the government to fall on its own sword for the reasons hereinafter set forth.
There is no dispute as to the facts that both DiPiazza and CI #2 were completely unknown to the IRS and Agent DelValle when they appeared in his office in an unsolicited visit on April 27, 1997 and that neither DiPiazza nor CI #2 had ever acted as informants for any government agency before this date. Simply stated, they were totally unknown strangers who walked in off the street on April 27, 1997. Therefore, these facts are most pertinent in examining the "totality of the circumstances" which caused the warrant in question to be issued. It is also imperative that the DelValle affidavit be examined and analyzed in its "totality" in order to resolve the issues herein.
A defendant is permitted to challenge the veracity of a search warrant in limited circumstances. One such circumstance is where the affidavit in support of the search warrant is alleged to contain deliberately or recklessly false or misleading information.
United States v. Canfield, 212 F.3d 713, 717 (2d Cir. 2000); see also Franks v. Delaware, 438 U.S. 154, 164-72 (1978).
Since the government has admitted that the DelValle affidavit contains false or erroneous information, the only issue in this context to be resolved is whether the providing of false information was done deliberately or with reckless disregard for the truth or accuracy of such information and was necessary for the finding of probable cause. Further, as a result of the government's admission, "the issuing judge's probable cause determination is not due any deference because he did not have an opportunity to assess the affidavit without the inaccuracies." Canfield, 212 F.3d at 717.
To suppress evidence obtained pursuant to an affidavit containing erroneous information, the defendant must show that: (1) the claimed inaccuracies or omissions are the result of the affiant's deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the [issuing] judge's probable cause finding.
Canfield, 212 F.3d at 717-18, citing United States v. Salameh, 152 F.3d 88, 113 (2d Cir. 1998).
The government argues that when you excise the allegations of Agent DelValle and the references to CI #2 in the DelValle affidavit, there is still a basis for finding probable cause for the issuance of the warrant since the statements of, and references to, DiPiazza support such finding. The Second Circuit Court of Appeals has created a detailed "roadmap" for carrying out this analysis in Canfield wherein it states:
To determine if the false information was necessary to the issuing judge's probable cause determination, i.e., material," a court should disregard the allegedly false statements and determine whether the remaining portions of the affidavit would support probable cause to issue the warrant.". . . If the corrected affidavit supports probable cause, the inaccuracies were not material to the probable cause determination and suppression is inappropriate. As with the inclusion of false information, "[o]missions from an affidavit that are claimed to be material are governed by the same rules." United States v. Ferguson, 758 F.2d 843, 848 (2d Cir. 1985). The ultimate inquiry is whether, after putting aside erroneous information and material omissions, "there remains a residue of independent and lawful information sufficient to support probable cause." Id. at 849.
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Once the inaccurate information has been removed from the affidavit, the remaining portions of the affidavit should be reviewed de novo to determine if probable cause still exists. . . . When the affidavit in support of the search warrant is based on information obtained from a confidential informant, "courts assess the information by examining the totality of the circumstances bearing upon its reliability."
Canfield, 212 F.3d at 718, citing United States v. Smith, 9 F.3d 1007, 1012 (2d Cir. 1993) (quoting Illinois v. Gates, 462 U.S. at 230-31).
The DelValle affidavit consists of twenty-eight (28) paragraphs, and I have found from my review of the affidavit, that paragraphs 6, 9, 10, 11, 12, 13, 14, 16, 17 and 18 are crucial in nature for the issuance of the warrant. DiPiazza is referenced in paragraphs 6, 10, 11, 12, 13, 15 and 19, but particular emphasis and focus is put on paragraph 13. False information relating or attributed to CI #2 is also contained in paragraphs 6, 10, 11, 12, 13 and 15 and in fact, intertwines with the information allegedly supplied by DiPiazza. Because of the nature of the issues at hand, I have determined that brevity must be sacrificed in order to accomplish a proper and complete analysis as to whether probable cause could be found based on the references to DiPiazza alone, and therefore, have taken the liberty of setting forth in detail, the pertinent allegations in the DelValle affidavit upon which I am basing my determination and recommendation.
The DelValle Affidavit
In his affidavit, sworn to September 8, 1997, submitted in support of his application for a search warrant for defendant's premises, Agent DelValle stated the following, among other things:
6. This investigation is being conducted by the I.R.S. The investigation thus far has consisted of physical surveillance, record requests, public record checks, and analysis and examination of Federal Income Tax returns as well as records and information received from Confidential Informants. I am presently assigned to the investigation of JEFFERY G. HEUBUSCH d/b/a as the SOUTHSIDE DELI and any facts or circumstances which are mentioned in this affidavit are familiar to me either through my direct participation in the related investigative activity or from my discussions with the Confidential Informant. I have familiarized myself with all of the documents and records obtained thus far in this investigation either directly or from a review of reports and records obtained by other agents participating in (sic) the investigation.
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8. HEUBUSCH operates a sole proprietorship known as SOUTHSIDE DELI located at 300 Ellicott Street, Batavia, New York, and did so during the years 1992 through 1996. SOUTHSIDE DELI is a retail food business involved in the sale of prepared and packaged food products to the general public. On his federal tax returns, HEUBUSCH lists his residence as 300 Ellicott Street, Batavia, New York. HEUBUSCH lives in an apartment over the DELI at that address. HEUBUSCH also owns two houses in Batavia: one located at 207 Washington Avenue which he purchased in 1986 and another house at 46 Pearl Street, which he purchased in 1993. He also owns the lot adjacent to 300 Ellicott Street, which he purchased in 1993.
9. HEUBUSCH operates his DELI from 9:00 a.m. to 10:00 p.m. Sunday through Thursday and from 9:00 a.m. to 11:00 a.m. (sic) on Friday and Saturday. Based on the information set forth below, HEUBUSCH does not record any sales onto the cash register tape in the DELI for sales made after 8:00 p.m. Thus, the cash register tapes used to record gross receipts fail to account for the after 8:00 p.m. sales. On his federal income tax returns, HEUBUSCH only claimed the income recorded on the cash register tape. Thus, HEUBUSCH has evaded paying tax on the income received daily through the DELI after 8:00 p.m.
10. On April 27, 1997 two (2) Confidential Informants (hereinafter referred to as CI #1 and CI #2) came into the office of Criminal Investigation Division, 10 Fountain Plaza, Buffalo, New York. CI #1 has known HEUBUSCH for approximately 19 years and worked with him at the DELI for several years including the years for which records are being sought. CI #1 worked as a manager in the DELI and is familiar with HEUBUSCH's business and personal operations, including record keeping and other financial operations. CI #2 also worked in the DELI for some of the years in question. Both CIs were familiar with the business and record keeping activities of HEUBUSCH and for years had access to the books and records relative to his operation of SOUTHSIDE DELI.
11. CI #1 and CI #2 told me that HEUBUSCH utilizes a cash register that records each transaction on an internal cash register tape. Each night HEUBUSCH works at the DELI, he turns off the internal tape at 8:00 p.m. As a result, the sales after 8:00 p.m. are not recorded on that day's tape. CI #1 stated that HEUBUSCH advises his accountant of only the gross receipts recorded on the tape when preparing his federal income tax returns. CI #1 produced records from SOUTHSIDE DELI, which revealed the extent to HEUBUSCH (sic) had been skimming profits from the business and had been diverting the skimmed profits for personal use. CI #2 was also aware of how the skimming had been perpetrated by HEUBUSCH. CI #1 obtained the records directly from SOUTHSIDE DELI prior to contacting IRS and stated that they had been created and maintained by HEUBUSCH at the DELI.
12. The records provided by CI #1 consisted of an original receipt book for the period of September 1989 to May 1993 in which HEUBUSCH recorded the daily receipts earned by SOUTHSIDE DELI. CI #1 also provided copies of similar books for the period of May 1993 through May 1996. CI #1 stated that the original books from which the copies were made are still located at the DELI and are located in, on, or in the general vicinity of the desk in the DELI's office. CI #1 last observed a (sic) original book similar to the book that she previously provided to me on the desk at SOUTHSIDE DELI approximately three weeks prior to August 5, 1997. CI #1 and CI #2 have also observed various business records, including boxes and envelopes containing bank records, as well as a computer in the general vicinity of the desk on which the receipt books were located. (See attached Exhibit A which is a sketch of the premises of SOUTHSIDE DELI, 300 Ellicott Street, Batavia, New York, as described by the confidential informants). The confidential informants did not know the purpose for which HEUBUSCH utilized the computer in the DELI.
13. CI #1 advised me that the entries recorded in the original book and the copies of subsequent books that were provided to me detail SOUTHSIDE DELI's sales, broken down into columns for reported and unreported sales, on a daily basis. The sales are broken down in columns which separate the DELI's daily income recorded on the cash register tapes (and reported to the IRS) and the amounts collected after 8:00 p.m. and not recorded on the cash register tapes (which were not reported to the IRS). Both of the confidential informants stated that the information was entered into the books by HEUBUSCH on a daily basis. Because HEUBUSCH has maintained these types of records daily over the past eight years, it is probable that he continues to maintain similar records today.
14. Attached as exhibit B is a copy of two pages of the books produced by CI #1, relating to daily gross sales for the period of July 13, 1993 to August 7, 1993. The column at the left side of the page (which I marked "A") reflects the gross sales after 8 pm which are not on the cash register receipts and not reported by HEUBUSCH on his federal income tax returns. The next column to the right (which I marked "B") reflects the number of customers per day and average spent per customer that day including both reported and reported (sic) receipts. The next column to the right (which I marked "C") reflects the date of the sales. The column at the right side of the page (which I marked "D") reflects the gross sales and sales tax recorded on the cash register receipts which were reported by HEUBUSCH on his federal income tax returns. By skimming the profits and not reporting them as income on his filed Federal Income Tax Returns HEUBUSCH has demonstrated probable cause to believe that criminal tax violations in contravention of Title 26, United States Code, Sections 7201 and 7206(1) have occurred.
15. Attached as Exhibit C are two pages of the receipt book provided by CI #1, for the period March 29, 1994, through April 23, 1994. The entries for the dates of April 2, 1994, through April 6, 1994, reflect that there were no unreported sales for those dates. The notation "vacation" was placed in the book by HEUBUSCH for those dates. The confidential informants explained that on days HEUBUSCH was out of town and not working in the evening, the cash register tape was not deactivated after 8:00 pm. Thus, all income for those dates were recorded on the tape and reported on HEUBUSCH'S federal income tax return.
16. SOUTHSIDE DELI is a "Schedule C" business for income tax reporting requirements. This means that the gross receipts of the business, and resulting net income, are included on the owner's, HEUBUSCH's, annual Individual Income Tax Returns. I compared the reported gross income on HEUBUSCH's filed 1993 through 1996 Individual Income Tax Returns to the reported income column detailed in the original book and copies of the subsequent book provided by the CI #1 (described in paragraph 13, above) with the following results:
The accuracy of depiction of the areas in the sketch that can be observed from the store accessible to customers were verified by agents conducting this investigation.
Set forth mathematically: Bottom # of Column B = (Column A + Column D)/top # of Column B.
Year Per Books Per Return Difference
1993 $588,311.35 $639,471.00 ($51,159.65)*
The 1993 records from CI #1 are missing the daily receipts from 5/21/93 through 6/16/93, inclusive, which explains the difference between the figures.
1994 $692,628.00 $692,628.00 0
1995 $811,214.99 $814,805.00 ($ 3,590.01)
1996 only five (5) months records are available
The fact that the gross income figures detailed in the books provided by the CI #1 reconciles to the gross income reported by HEUBUSCH on his federal tax returns (with the exceptions caused by incomplete information due to missing pages), Schedule C for SOUTHSIDE DELI, clearly corroborates the accuracy of the books. Given the above facts, it is necessary to obtain the 1992 through 1996 original books and other financial records in order to successfully investigate this matter.
17. I also tabulated the unreported income column of the original book and the copies of the subsequent books that were obtained from CI #1 and has (sic) determined that HEUBUSCH failed to report the income on his federal income tax returns:
1992 $89,995.00
1993 $80,883.00
1994 $86,541.00
1995 $77,422.00
1996 $17,401.00 _____________________________ $352,242.00
18. HEUBUSCH's Individual Income Tax Returns (Forms 1040), for the years 1993 through 1996 revealed taxable income of:
1993 $23,180.00
1994 $ 6,110.00
1995 $ 9,007.00
1996 $19,301.00
The books and records of HEUBUSCH's business provided by CI #1 to IRS reveal additional unreported gross income in these four years of approximately $262,000.
19. Although HEUBUSCH maintained a clear and accurate record of SOUTHSIDE DELI's true gross receipts, he failed to report the correct amounts on his 1992-1996 U.S. Individual Income Tax Returns. CI #1 informed me that HEUBUSCH provided his accountants only amounts of sales shown on the cash register tapes, thus causing the gross and taxable income to be substantially understated on his tax returns. This resulted in a significant amount of evaded tax and a tax loss to the government. Based on your affiant's experience, HEUBUSCH will presumably assert his Fifth Amendment Right, prohibiting the I.R.S. from obtaining the necessary records from him, should the service attempt to obtain them with a summons under the authority granted it in 26-U.S.C. § 7602(a).
Affidavit of Agent Michael A. DelValle, sworn to on September 8, 1997 ("DelValle Affidavit"), at ¶¶ 6, 8-19 (emphasis added).
The Information Supplied or Attributed to CI #1, Clorey DiPiazza
Agent DelValle states in paragraph 6 that part of his investigation is based on his "discussion with the Confidential Informant." Although he does not indicate whether he is referring to CI #1 or CI #2, for purposes of this determination, I have presumed that the reference is to CI #1, i.e., DiPiazza. This presumption is further supported by the government's contention wherein it states in its legal brief, that "DiPiazza was the authoritative source for virtually all of the substantive information set forth in the affidavit" and that "CI #2 was not the source of any original information."
In paragraph 10, DelValle states that DiPiazza has known the defendant for approximately 19 years and worked with him at the deli for several years in the role of a manager. She was familiar with defendant's business and personal operations, including record keeping and other financial operations. However, DelValle fails to point out, either through lack of knowledge or deliberately, that DiPiazza had been the common law wife of defendant and that they had a falling out prior to her visit to DelValle's office. In essence, there was a material omission of the fact that DiPiazza could also be described as a "woman scorned" and as such, had a motive for harming the defendant. Had this fact been included, or not omitted, it may have had a bearing on the issue of veracity and/or reliability of DiPiazza as an informant and would have been available for the issuing magistrate judge to consider. I definitely consider it an element, under the "totality of circumstances," to be considered in the context of determining DiPiazza's veracity and reliability.
"[A]n informant's `veracity,' `reliability' and `basis of knowledge' are all highly relevant in determining the value of his report." Illinois v. Gates, 462 U.S. 230. Since DelValle had never met DiPiazza and knew absolutely nothing about her, he merely accepted her background statements as being true and relied on her statements as a "basis for her knowledge." The decisions of the United States Supreme Court in "applying the totality of the circumstances analysis . . . have consistently recognized the value of corroboration of details of an informant's tip by independent police work." Id. at 241. Admittedly, the United States Supreme Court has stated that "even if we entertain some doubt as to an informant's motives, his explicit and detailed description of alleged wrongdoing, along with a statement that the event was observed first-hand, entitles his tip to greater weight than might otherwise be the case." Id. at 234.
Although the attributions to DiPiazza set forth in paragraph 11 of the DelValle Affidavit appear to give a detailed and explicit description of the defendant's bookkeeping methods and his alleged wrongdoing, the corroboration of this information is not only lacking, it appears to be proven to be inaccurate by the remainder of the affidavit. Agent DelValle's corroborating efforts, at least as set forth in his affidavit, appear to actually impeach the veracity and reliability of DiPiazza. Further, the reliability and veracity of DiPiazza is tainted by the intertwined references to CI #2 in paragraphs 10, 11, 12, 13 and 15 of this affidavit. In paragraph 10, he states that "CI #2 also worked in the DELI for some of the years in question" and that "both CIs were familiar with the business and record keeping activities of the defendant and for years had access to the books and records relative to his operation of SOUTHSIDE DELI." (emphasis added) The government now admits that the statement that CI #2 "worked in the DELI" is false. Since she did not work there, she would not have had access to the books and records. What is even more troubling is the fact that since DiPiazza was a manager at the deli as claimed in paragraph 10, she knew that CI #2 had not worked there. It can safely be presumed that DelValle did not fabricate this statement and that, instead, it came from either DiPiazza or CI #2 or both. If it were made by CI #2, then DiPiazza knew it to be false, should have corrected it and not allowed DelValle to be misled. If it came from DiPiazza, then she has given a false statement to the government agent. Allowing such false information to be given, thereby misleading Agent DelValle, gives further credence to the defendant's claim that DiPiazza was a "woman scorned" who was seeking retribution against the defendant by making false allegations against him and therefore, her veracity and reliability should be questioned.
In paragraph 11 of the affidavit, Agent DelValle states that "CI #1 and CI #2 told [him]" about how the defendant operated the cash register in the DELI. (emphasis added) Since the government has admitted that CI #2 did not work at the deli, she would not be in a position to personally have such knowledge. As previously stated, DiPiazza would have known that CI #2 would not have had personal knowledge about the internal operations of the defendant's business and, therefore, when DelValle states that CI #2 told him about such operations, DiPiazza either requested such misrepresentations be made by CI #2, her friend, or at a minimum, condoned the providing of false information and the misleading of Agent DelValle by CI #2. This misleading is further compounded when Agent DelValle asserts in the same paragraph 11, that "CI #2 was also aware of how the skimming had been perpetrated by Heubusch." Once again, CI #2 would not have personal knowledge of this, and obviously Agent DelValle accepted it as being true based on the statement that CI #2 "worked in the DELI for some of the years in question." Since that statement was untrue, it more logically follows that CI #2 was not aware of how any alleged skimming had been perpetrated by the defendant.
The remainder of paragraph 11 of the affidavit contains the information supplied by DiPiazza, to wit, that the defendant "advises his accountant of only the gross receipts recorded on the tape when preparing his federal income tax returns" and that she produced records allegedly from the deli. However, the clause with respect to these records appears ambiguous and, therefore, in need of interpretation. More specifically, it is stated: "which [the records] revealed the extent to HEUBUSCH (sic) had been skimming profits from the business and had been diverting the skimmed profits for personal use." An examination of the records by merely looking at them does not, in and of itself, reveal anything other than columns and numbers. The analysis of these records, as will be discussed later, was done by Agent DelValle whose statements in the affidavit are excluded for purposes of providing a basis for establishing probable cause. Canfield, 212 F.3d 713. All that existed for the issuing magistrate judge to consider, as far as DiPiazza is concerned, are her conclusory statements set forth in paragraphs 11 and 13 of the DelValle affidavit. It is worth noting that in paragraph 12 of the affidavit, DiPiazza states that the defendant maintains the books and records "in the general vicinity of the desk in the DELI's office" and that she has "also observed . . . a computer in the general vicinity of the desk on which the receipt books were located" but that she "did not know the purpose for which Heubusch utilized the computer in the DELI." (emphasis added) In this day and age, it is reasonable to assume that the final accounting records of the deli's business may have been stored in the computer, especially considering its location, and that the handwritten entries in the books and records produced by DiPiazza were not necessarily the actual records utilized for tax preparation purposes.
Paragraph 13 of the DelValle affidavit is a crucial one along with DelValle's allegations set forth in paragraphs 14, 16, 17 and 18. In paragraph 13, DiPiazza purportedly claimed the following:
13. CI #1 advised me that the entries recorded in the original book and the copies of subsequent books that were provided to me detail SOUTHSIDE DELI's sales, broken down into columns for reported and unreported sales, on a daily basis. The sales are broken down in columns which separate the DELI's daily income recorded on the cash register tapes (and reported to the IRS) and the amounts collected after 8:00 p.m. and not recorded on the cash register tapes (which were not reported to the IRS). Both of the confidential informants stated that the information was entered into the books by HEUBUSCH on a daily basis. Because HEUBUSCH has maintained these types of records daily over the past eight years, it is probable that he continues to maintain similar records today. (emphasis added)
Once again, the allegations by DiPiazza as set forth in paragraph 13 above are strictly conclusions. The actual records produced by DiPiazza needed analysis in order to determine whether such conclusions were in fact valid.
The core question in assessing probable cause based upon information supplied by an informant is whether the information is reliable. Information may be sufficiently reliable to support a probable cause finding if the person providing the information has a track record of providing reliable information, or if it is corroborated in material respects by independent evidence.
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An inquiry into the reliability of an informant's information is usually of two general types, not necessarily mutually exclusive: an inquiry into an informant's veracity and an inquiry into the quality of his sources of knowledge of the information. By quality of sources we mean the degree to which his information is based on reliable means, such as first-hand observations or second-hand information from reliable sources, rather than on unreliable means such as rumor and innuendo.
* * * Even where an informant has no proven record, if an informant's declaration is corroborated in material respects, the entire account may be credited, including parts without corroboration.
United States v. Wagner, 989 F.2d 69, 72-73 (2d Cir. 1993) (emphasis added).
Once again, in paragraph 13 of the DelValle affidavit, we have intertwined false information, or at a minimum, misleading information wherein it is stated:
Both of the confidential informants stated that the information was entered into the books by HEUBUSCH on a daily basis. (emphasis added)
It is apparent that the inclusion of CI #2's alleged knowledge about this allegation is based on the false representation contained in paragraph 10 that CI #2 "worked in the DELI for some of the years in question." As previously pointed out, since CI #2 in fact did not work at the deli, she would not have had personal knowledge of what occurred there on a daily basis.
I find the government's position on the use of CI #2 in the affidavit to be troubling wherein it states in its memorandum of law that "CI #2 was not the source of any original information" and that the "information attributed to CI #2 bolstered what DiPiazza (CI #1) provided but did not provide anything new" and "that CI #2's presence in the affidavit did nothing more than `bootstrap' the information provided by Clorey DiPiazza." I disagree with these assertions. A reading of the DelValle Affidavit clearly indicates that CI #2 was held out to be a primary source of information along with DiPiazza and that CI #2 further allegedly corroborated the information given by DiPiazza so as to increase the value of the reliability and veracity of the totally unknown informant, DiPiazza. This is admitted by the government in its memorandum:
In this case, the worst that can be said of the agent's conduct, even assuming that it was intentional, is that he used CI #2 to bolster DiPiazza's credibility. (emphasis added)
Even if we were to untangle and remove the intertwinings attributed to CI #2 from the affidavit, the reliability and veracity of DiPiazza remains a serious issue to be addressed and resolved in the context of whether standing alone, her alleged statements and attributions stated by DelValle in his affidavit, constitute probable cause for the issuance of the warrant. I find that they do not, and in fact, DelValle's analysis of what DiPiazza presented to him contradicts her alleged detailed knowledge of defendant's tax fraud.
Except for her conclusory statements as set forth in the DelValle affidavit as aforesaid, all DiPiazza provided was "raw data" in the form of the alleged books and records of the deli which she turned over to Agent DelValle. I have no doubt whatsoever that the statements of DiPiazza standing alone were not what caused the issuing magistrate judge to find probable cause. Rather, it was the alleged detailed analysis made of this "raw data" by an experienced IRS agent of twenty (20) years with a degree in accounting that brought about this finding.
In paragraph 14 of his affidavit, Agent DelValle describes how he took samples of the "raw data" produced by DiPiazza, which he attached as "Exhibit B" to his affidavit, and described each column in that data which he marked as "A", "B", "C" and "D".
It is clear from the affidavit of Agent DelValle that he relied exclusively on the statements and alleged explanations of DiPiazza as to how to interpret the entries in the "Receipt Books" supplied by her. His alleged mathematical and analytical corroboration of these interpretations or explanations is nothing more than a "bootstrapping" conclusion and quite frankly, the "analysis" relied on by him appears to require a different conclusion.
In explaining the entries in the "Receipt Books," Agent DelValle sets forth a "mathematical formula" utilized by him in arriving at his conclusion to support a finding of probable cause. See DelValle Affidavit at page 7, fn. 2. He states that the bottom # of Column B (which is the average dollar amount spent per customer on a given day) equals the total of Column A (which is the daily "unreported receipts") plus Column D (which is the reported daily receipts) divided by the top # of Column B (which is the daily number of customers on a given date).
As pointed out by defense counsel and as verified by the Court, application of the DelValle formula does not result in the figures set forth in Column B of the "Receipt Books'" entries. Counsel for the government admits in his responding papers to the motion herein, that the formula set forth by Agent DelValle in his affidavit is "misstated." I also find the explanation asserted by government counsel in his first memorandum in opposition to defendant's motion as to this "misstatement" to be incomprehensible. See footnote 2 on page 5 of the government's first memorandum. Furthermore, the government's post facto "correcting explanation" in its subsequent memorandum simply cannot cure the defect which existed at the time the affidavit was presented to the issuing magistrate judge in support of the warrant application. The issue to be resolved is whether there was probable cause established in the supporting affidavit at the time it was presented to the magistrate judge in support of the application for a search warrant. The only conclusion that can be reached is that the mathematical formula, as stated by Agent DelValle, was inaccurate and therefore, any conclusions based thereon were tainted or unreliable. Since DiPiazza allegedly is the explanatory source for this information, on the surface it appears that her information, as stated and as analyzed and presented to the issuing magistrate judge, was not true, or at the least, was not correct, and therefore, by itself, is not "reliable."
In paragraph 15 of his affidavit, Agent DelValle states that "all income for those dates" (referring to April 2-April 6, 1994) "were (sic) recorded on the tape and reported on HEUBUSCH'S federal income tax return." (emphasis added) The federal income tax return of the defendant would only show a gross receipts figure for the tax year and not be broken down into the daily or weekly receipts. Furthermore, in paragraph 8 of the affidavit, it is alleged that the defendant also owns "two houses in Batavia" and the "lot adjacent to 300 Ellicott Street." It is reasonable to conclude that these "two houses" are rental income properties and as such, not only would there be "income" elements to report, but also, undoubtedly there would be business expenses and depreciation to report as well, thereby impacting on the total return. Therefore, Agent DelValle could not know whether all income for those dates had been reported or not by just looking at the copies of sheets given to him by DiPiazza. However, this does not end my concern with the contents of the DelValle Affidavit.
In paragraph 16 of his affidavit, DelValle states that he made a comparison of defendant's tax returns for the years 1993 through 1996 with the "Receipt Books" given to him by DiPiazza, i.e., a comparison of the "reported gross income" on the tax returns with the "reported income column detailed in the original book and copies of the subsequent books provided by CI #1" (DiPiazza) and sets forth numerically the results of ths comparison. What is most perplexing is Agent DelValle's statement in paragraph 16 as to his conclusion reached as a result of this comparison, to wit:
The fact that the gross income figures detailed in the books provided by the CI #1 reconciles to the gross income reported by HEUBUSCH on his federal returns (with exceptions caused by incomplete information due to missing pages), Schedule C for SOUTHSIDE DELI, clearly corroborates the accuracy of the books. (emphasis added)
My review of the figures set forth in Agent DelValle's affidavit causes me to conclude just the opposite of his stated conclusion. The figures for reported book income and tax return income for 1993 and 1995 DO NOT match and therefore, are not reconciled. There are no figures set forth for 1996. As to the year 1994, Agent DelValle claims that the "book recorded" income was reported as income on the return. This determination does not establish probable cause that a crime or tax fraud was committed. At a minimum, the 1994 figures present a neutral conclusion; at best, a finding of compliance with the tax law. More importantly, the tax reported income for the years 1993 and 1995 EXCEEDED the book reported income. How then can it be said that these alleged comparisons establish probable cause that tax fraud has been committed by the defendant? Simply stated, it cannot! Nor can such analysis be claimed to corroborate the allegations of DiPiazza.
Agent DelValle obviously attempted to create the impression that his independent analysis of the books and records of the deli as produced by DiPiazza and his use of this information in comparing it with the tax returns filed by defendant corroborated what DiPiazza had told him in order to convince the issuing magistrate judge to find probable cause. However, it is this faulty analysis and "forced accounting" that requires a finding that probable cause does not exist to justify the issuance of the warrant.
Because the alleged statements of DiPiazza and CI #2, as reported in the affidavit, are so intertwined not only with each other, but also with the allegations of Agent DelValle relating to his analysis of the "raw data" and a review of defendant's tax returns, the "totality of the circumstances" herein requires a finding that there in fact was not a proper basis established in order for the issuing magistrate judge to find probable cause based solely on the information attributed to DiPiazza. Once again,
The issuing judge's probable cause determination is not due any deference because he did not have an opportunity to assess the affidavit without the inaccuracies.
United States v. Canfield, 212 F.3d at 713 (emphasis added).
The only remaining issue to be considered is whether the "good faith exception to the exclusionary rule" should be applied in accordance with United States v. Leon, 468 U.S. 897 (1984) as claimed by the government. However, as the government acknowledges, the "good faith exception" does not apply where the warrant at issue was obtained as a result of the issuing magistrate judge having been "misled by information in an affidavit that the affiant knew was false or would have known was false except for his reckless disregard of the truth." Id. at 923; Franks v. Delaware, 438 U.S. 154 (1978).
Since the government has conceded that the "mathematical formula" set forth in DelValle's affidavit is "misstated" and therefore erroneous, the question to be resolved is whether this error was nevertheless used by Agent DelValle knowing it to be false or in a reckless disregard for the truth. Certainly, as an experienced accountant with twenty (20) years of IRS service in the CID (see paragraph 1 of the DelValle Affidavit), he easily could have done the mathematical calculation based on the explanation of the entries in the "Receipt Books" as given to him by DiPiazza and determined that such explanation was erroneous or untrue and therefore, not reliable. Why this was not done, or if done and ignored, is unknown. Nevertheless, it was not verified and therefore, I can only conclude that the agent had a reckless disregard for the truth. However, this is not the end of the matter, for there are other substantive issues that cause me to continue in my belief that Agent DelValle acted in such a way as to demonstrate, at a minimum, a reckless disregard for the truth. His conclusions, based on his assertions in paragraphs 16 and 17 of his affidavit as to what his analysis of the books and records established in a comparison of same with defendant's tax returns for the tax years 1993 through 1996, are totally unsupportable from either a legal or accounting perspective and defy logic.
As previously stated, a comparison of defendant's tax returns with Agent DelValle's alleged analysis of the books and records do not match up as claimed by him. In fact, the income reported on the tax returns for the years 1993 and 1995 exceeds the alleged "book income." The 1996 comparison is of no value whatsoever since it only includes five (5) months of records. The conclusion drawn as to this tax year is nothing more than pure speculation by DelValle and certainly not the kind of analysis and determination one would expect from a trained accountant. The comparison undertaken for the tax year 1994 is merely neutral and establishes nothing for purposes of probable cause that a tax fraud has been committed by the defendant. Agent DelValle's attempt to read more into this by his allegations in paragraph 16 borders on being legally ludicrous. So too is his explanation for the results of the 1993 tax year comparison as set forth in his footnote 3 in the DelValle Affidavit. I conclude that such statements and allegations made by Agent DelValle in his affidavit clearly demonstrate a total disregard for the truth of such statements and allegations and were made recklessly and resulted in the issuing magistrate relying on his expertise and experience as a twenty (20) year IRS agent for finding probable cause. By affirmatively using the erroneous and misstated mathematical formula and his faulty comparison with the defendant's tax returns, Agent DelValle unequivocally concluded and stated that the defendant was "skimming the profits and not reporting them as income on his filed Federal Income Tax Returns" and that "HEUBUSCH has demonstrated probable cause to believe that criminal tax violations . . . have occurred." These factual misstatements were more than "peripheral relevancy" and were presented as being the personal work product of Agent DelValle based on his analysis of the records produced by DiPiazza and his comparison of this "analyzed" data with defendant's tax returns. Such misstatements formed the legal heart and soul of the affidavit in the attempt to establish probable cause and therefore, went to the very integrity of the affidavit. Obviously, the issuing magistrate judge relied on this conclusion, rather than the raw data supplied by DiPiazza and her uncorroborated statements, to find probable cause for the issuance of the warrant.
The magistrate has no acquaintance with the information that may contradict the good faith and reasonable basis of the affiant's allegations. The pre-search proceeding will frequently be marked by haste, because of the understandable desire to act before the evidence disappears; this urgency will not always permit the magistrate to make an extended independent examination of the affiant or other witnesses.
Franks v. Delaware, 438 U.S. at 169.
Notwithstanding this conclusion, the government nevertheless argues that the "good faith" exception should apply for the search conducted pursuant to the warrant by other agents and/or representatives of the IRS excluding Agent DelValle. I reject this contention since it appears that Agent DelValle was in charge of this investigation:
I am presently assigned to the investigation of JEFFREY G. HUEBUSCH d/b/a as the SOUTHSIDE DELI and any facts or circumstances which are mentioned in this affidavit are familiar to me either through my direct participation in the related investigative activity or from my discussions with the Confidential Informant.
DelValle Affidavit at ¶ 6.
As a result, I conclude that any activity in executing the search warrant by other agents would have been done at the direction of and under the supervision of Agent DelValle. Since DelValle, for the reasons previously stated, demonstrated a reckless disregard for the truth in this matter in obtaining the warrant and caused the issuing magistrate to be misled by his actions, the warrant and the directions given by him as "case agent" to other agents were totally tainted so as to destroy any concept of "good faith" by those he was directing and/or supervising in carrying out the search pursuant to the warrant.
Since I have recommended granting of the defendant's motion to suppress, there is no necessity at this time to address the discovery issues raised by the defendant.
CONCLUSION
Based on the foregoing, I recommend that the defendant's motion to suppress the evidence seized pursuant to the warrant at issue be granted and that all such evidence be suppressed. Therefore, it is hereby ORDERED pursuant to 28 U.S.C. § 636(b)(1) that:
This Report, Recommendation and Order be filed with the Clerk of the Court.
ANY OBJECTIONS to this Report, Recommendation and Order must be filed with the Clerk of this Court within ten (10) days after receipt of a copy of this Report, Recommendation and Order in accordance with the above statute, Fed.R.Civ.P. 72(b) and Local Rule 72.3(a)(3).
The district court will ordinarily refuse to consider de novo, arguments, case law and/or evidentiary material which could have been, but was not presented to the magistrate judge in the first instance. See, e.g., Patterson-Leitch Co., Inc. v. Massachusetts Municipal Wholesale Electric Co., 840 F.2d 985 (1st Cir. 1988). Failure to file objections within the specified time or to request an extension of such time waives the right to appeal the District Court's Order. Thomas v. Arn, 474 U.S. 140 (1985); Wesolek, et al. v. Canadair Ltd., et al., 838 F.2d 55 (2d Cir. 1988).
The parties are reminded that, pursuant to Rule 72.3(a)(3) of the Local Rules for the Western District of New York, "written objections shall specifically identify the portions of the proposed findings and recommendations to which objection is made and the basis for such objection and shall be supported by legal authority." Failure to comply with the provisions of Rule 72.3(a)(3), or with the similar provisions of Rule 72.3(a)(2) (concerning objections to a Magistrate Judge's Decision and Order), may result in the District Court's refusal to consider the objection.
The Clerk is directed to send a copy of this Report, Recommendation and Order to the attorneys for the parties.