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United States v. Melton

United States Court of Appeals, Eighth Circuit

August 31, 2017

United States of America Plaintiff- Appellee
Andrew Thurman Melton Defendant-Appellant

          Submitted: March 10, 2017

         Appeal from United States District Court for the Eastern District of Arkansas - Little Rock

          Before RILEY, [1] Chief Judge, GRUENDER, Circuit Judge, and SCHREIER, [2] District Judge.


         A jury found Andrew Melton guilty of twelve counts of mail fraud and five counts of failure to pay employment taxes. See 18 U.S.C § 1341; 26 U.S.C. § 7202. The district court[3] sentenced Melton to seven years in prison. Melton appeals his convictions and sentence. We affirm. See 28 U.S.C. § 1291 (appellate jurisdiction).

         I. BACKGROUND

         A. Factual History

         1. Mail Fraud and Payroll Tax Schemes

         In 1998, an Arkansas state court issued a $73, 000 judgment against Melton for his failure to pay an interior design firm for its work on his home in Little Rock. Some time after, Melton moved to Texas, having made no payments on the judgment. In September 2005, Melton became chief financial officer of ThermoEnergy Corporation, a publicly traded corporation headquartered in Little Rock, focused on licensing clean water technologies and water purification systems. Gary Mertins, the designer whom Melton had shorted, received word Melton was back in Arkansas and asked his brother and attorney, William Mertins, to help him collect the 1998 judgment. William Mertins filed a writ of garnishment regarding the 1998 judgment, which at the time had grown to over $127, 000 with interest.

         In July 2006, two Pulaski County, Arkansas, sheriff deputies arrived at ThermoEnergy with a writ of execution for the garnishment of Melton's wages. Melton was not in the office, and instead, the garnishment was served on David Cossey, ThermoEnergy's chief executive officer. Cossey later approached Melton about the garnishment, and Melton told Cossey he would "take care of it." Cossey assumed this meant Melton would deduct the payments toward the garnishment from his paycheck because, as chief financial officer, Melton controlled ThermoEnergy's budget and payroll. Not long after, Mertins Law Firm began receiving checks for approximately $3, 000 each month in service of Melton's garnishment.[4] Cossey and Melton did not discuss the garnishment again until 2009.

         In addition to managing ThermoEnergy's payroll, Melton was responsible for "oversee[ing] all [the company's] financial operations" and collecting, accounting for, and filing federal and state taxes related to payroll. In December 2008, an outside auditor from an accounting firm was conducting an annual audit when he noticed ThermoEnergy's payroll tax liability was much higher than in the years 2005, 2006, and 2007. The auditor, Michael Barron, sent ThermoEnergy's controller, Shelley Cline, an email about the liability. Cline sent Barron the details of the monthly entries into ThermoEnergy's payroll liability account. Over the next three months, Barron worked with Cline as he tried, and failed, to obtain necessary documentation from ThermoEnergy. With an audit deadline approaching, Barron eventually reached out to Melton directly on two separate occasions.

         On April 6, 2009, Barron sent Melton an email concerning the payroll tax liability. To complete his audit, Barron needed some kind of documentation from the Internal Revenue Service (IRS), and he was becoming concerned about potential penalties and fines. On April 14, 2009, the day before the deadline for late filing with the Securities Exchange Commission, Melton sent Barron a memorandum. The memorandum represented that Melton had been in "several discussions with the IRS" and was negotiating a payment plan to become current with the payroll tax liability.

         At some point around April 15, Barron and his boss Bill Kemp went to ThermoEnergy's office. Barron, Kemp, Cossey, ThermoEnergy attorney Gary Barket, and Melton met to address the payroll tax liability. Melton was asked to provide copies of IRS Forms 940 and 941, the forms used for filing payroll taxes, to verify he had paid and filed ThermoEnergy's payroll taxes. Throughout the meeting, Melton left and returned with a series of purported IRS forms that Melton claimed he had filed during the years 2006, 2007, 2008, and 2009. The documents, all signed and dated, were printed on forms that had the year 2009 scratched off in the upper corner. According to Barron, it was "very apparent" Melton was completing the forms "right then." On May 21, Barron sent Melton an email asking why he could not find corresponding documentation in ThermoEnergy's account for an alleged payroll tax payment. Melton responded and told Barron, "I gave you the wrong copy, there was no payment, I have correct copies for you."

         On May 28, 2009, ThermoEnergy's board of directors held an emergency meeting to address the payroll tax liability. The board authorized hiring an outside forensic auditing firm to investigate further and assess ThermoEnergy's potential civil and criminal liabilities. Over the next two months, the board entered into a series of resolutions limiting Melton's duties and authority, which included removing him from company accounts.

         Also on May 28, 2009, Barron was at ThermoEnergy working on the audit when he discovered a check for $9, 350 issued to Mertins Law Firm. Barron scanned through the prior year's audit and found eleven payments for $3, 102.80 each made to Mertins Law Firm. One of the checks was marked "garnishment." Barron asked Cossey about the payments, and Cossey told Barron about the garnishment on Melton's wages. Barron looked into Melton's payroll records, but found no indication of a garnishment. Barron discovered these routine payments to Mertins Law Firm were being classified as a legal expense of ThermoEnergy's. The board of directors ultimately ordered Melton to resign from ThermoEnergy by August 3, 2009.

         2. Forensic Audit and Federal Investigation

         ThermoEnergy enlisted certified public accountant Jeffrey Roberts to conduct a forensic audit investigation. On June 26, 2009, Roberts interviewed Melton. Melton told Roberts he had filed ThermoEnergy's payroll taxes "just maybe a month or two after their actual due dates." Melton informed Roberts that ThermoEnergy had a cash flow problem, and ThermoEnergy "had been dancing around it for years with the IRS and they didn't keep the notices they were sending." Roberts asked why Melton could not find documentation indicating the taxes had been filed with the IRS, and Melton speculated the forms had been misplaced because ThermoEnergy had recently moved office locations. Roberts also asked Melton about money Melton had taken from ThermoEnergy, such as checks Melton wrote made payable to cash, personal charges Melton made to his company credit card, and extensive travel charged to ThermoEnergy. Melton claimed he had paid for company expenses out of his own pocket, and the disbursements to himself were reimbursements for those charges, but Melton did not provide receipts or documentation of those alleged business-related expenses paid by him personally.

         In February 2011, the Federal Bureau of Investigation (FBI) received information prompting an investigation into Melton. In January and October 2012, FBI Special Agent Shaun Roth and IRS Special Agent Erica Williams conducted interviews with Melton. Melton alleged he had spent $800, 000 of his own money to pay for ThermoEnergy-related expenses, and ThermoEnergy still owed him approximately $150, 000 in reimbursement for those expenses. Melton said he would provide receipts and documentation of his expenses, but never did.

         As for the payroll tax liability, Melton alleged Cossey, Cline, and a member of the ThermoEnergy board knew payroll taxes were not being paid. During the first interview, Melton claimed he had met with a representative from the IRS at the federal building in Little Rock, but during his second interview he admitted this was untrue, and he had never spoken with anyone from the IRS. When the agents confronted Melton with the memorandum he had sent Barron stating he had been negotiating with the IRS, Melton admitted he created the document so Barron could complete his audit. Melton also told the agents that the Forms 940 and 941 he had given Barron were printed on forms created in 2009 only because he had not saved the originals. The agents inquired about entries made into ThermoEnergy's ledgers so it appeared as if ThermoEnergy had made payroll tax payments, but Melton stated he could not recall making such entries.

         B. Prior Proceedings

         In February 2013, a federal grand jury charged Melton with twelve counts of mail fraud, each count based on a separate check written to Mertins Law Firm in 2008 and 2009. In April 2014, the grand jury returned a superseding indictment adding five counts of failure to pay withholding taxes. See 18 U.S.C. § 1341; 26 U.S.C. § 7202. Melton pled not guilty.

         At trial, the government explained it intended to prove (1) Melton fraudulently took ThermoEnergy's money to pay his personal debt, and (2) Melton willfully failed to pay ThermoEnergy's payroll taxes in 2008 and the first quarter of 2009. The government called Cossey, Barron, Roberts, Special Agent Roth, and Special Agent Williams, among others. Cossey testified he did not approve Melton paying his personal debt with ThermoEnergy funds and stated he did not know the payroll taxes were unpaid until the audit revealed as much. Over Melton's objections, the district court received into evidence minutes from ThermoEnergy's board meetings; emails among Barron, Cline, Melton, and Cossey; Barron's audit report; and Roberts' forensic audit report. At the close of the government's case, Melton moved for judgment of acquittal, which the district court denied.

         Melton testified in his defense. Melton admitted the payroll taxes were not paid on time. Melton claimed ThermoEnergy owed him money because, due to the company's cash flow problem, he was forced to pay employees out of his own pocket, and so he would in turn "get cash back from the company when we had cash available." Melton acknowledged it was improper to pay his personal debt with money taken from ThermoEnergy's legal expense account, but claimed he did so because ThermoEnergy had not reimbursed him for about 75 trips he had taken from Dallas to Little Rock before he permanently moved back to Little Rock, and he "didn't do it properly" ...

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