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A federal judge has refused to grant a new trial for former Morgan Lewis & Bockius partner Allen W. Stewart — who was convicted of racketeering, fraud and money laundering in 1997 and sentenced to 15 years in prison — based on a recent decision from the U.S. Supreme Court that Stewart’s lawyers said shot a huge hole in the government’s theory of the case. In a 27-page decision handed down last week, federal Judge Harvey Bartle III of the U.S. District Court for the Eastern District of Pennsylvania ruled that Stewart can’t raise the issue now since his lawyers failed to raise it in his first round of appeals. But even if Stewart had preserved the issue, Bartle ruled that the U.S. Supreme Court’s decision last year in Cleveland v. United States wouldn’t require a new trial in Stewart’s case since many of the counts in his conviction would still stand. In Cleveland, the high court held that licenses issued by states are not property within the meaning of the federal mail fraud statute. Stewart, the former head of Morgan Lewis’ insurance department, was convicted on charges of draining the assets of two insurance companies he controlled and then selling the companies to unwitting buyers who soon discovered they were insolvent. In asking for a new trial, Stewart’s lawyers argued that the government’s theory of the case violates Cleveland since it was premised on Stewart’s fraudulently obtaining licenses from state regulators. Although Bartle agreed with Stewart that the jury instructions at his trial must now be considered flawed due to the Cleveland decision, he also found that Stewart is “procedurally defaulted” from raising the issue now, since he failed to raise it on direct appeal. Stewart’s first round of appeals was done when the U.S. Supreme Court handed down Cleveland and held that since the mail fraud statute “requires the object of the fraud to be ‘property’ in the victim’s hands,” the use of fraud to obtain a state license does not fall within the statute. As a result, the justices said, even though “licensees may have property interests in their licenses,” a scheme to defraud in order to obtain a license from a state regulator cannot be considered mail or wire fraud. Although Stewart raised the issue prior to trial and in his certiorari petition to the Supreme Court, he did not raise it during his direct appeal to the 3rd Circuit. Bartle found that such an issue can’t be raised in a later round of appeals unless the defendant can first demonstrate either “cause” and actual “prejudice,” or that he is “actually innocent.” “Cause” for failing to raise a claim would exist, Bartle said, only if the claim had “no reasonable basis in existing law.” In other words, Bartle said, the defendant has to show that the issue was “so novel that its legal basis was not reasonably available to counsel.” Stewart can’t meet that test, Bartle said, since his Cleveland claim is not novel at all. “At the time of Stewart’s trial and appeal the question whether licenses were property under [the fraud statutes] was a hotly contested issue subject to great debate in the lower courts. Many circuits had already reached the conclusion licenses were not property for purposes of the mail fraud statute,” Bartle wrote. While the 6th, 7th, 8th, 9th and 11th circuits had accurately predicted what the Supreme Court would later do, the 3rd and 5th circuits made the opposite determination, Bartle noted. But Stewart argued that it was because of the binding authority of the 3rd Circuit’s decision that he did not raise the license issue on direct appeal since it would have been futile for him to do so. Bartle said the Supreme Court has rejected that strategy, saying defendants cannot avoid procedural default simply by showing that a claim was unacceptable to a particular court at a particular time. As a back-up argument, Stewart insisted that his appellate lawyers were ineffective for missing the Cleveland issue. But Bartle found that the lawyers were simply exercising professional judgment when they opted to pursue what they believed to be the 10 best issues on appeal. “We find that the failure of Stewart’s counsel to anticipate the Supreme Court’s ruling in Cleveland does not amount to ineffective assistance of counsel and that Stewart has therefore failed to show ’cause’ for the procedural default,” Bartle wrote. Stewart’s only remaining argument was that Cleveland shows he is “actually innocent.” But Bartle found Stewart fell far short of meeting the test for actual innocence since “there was overwhelming evidence presented at trial that Stewart devised schemes to defraud people of money and property other than licenses, including premiums from policyholders and customers, dividends, and various types of fees.” The jury, Bartle said, “clearly found that property other than licenses was obtained through his schemes because it returned special verdicts requiring Stewart to forfeit specific amounts of money and pieces of property under the RICO and money laundering forfeiture laws.” REACHING THE MERITS Bartle also found that even if he had reached the merits of Stewart’s arguments, there would be no need to order a new trial. Stewart argued that he was entitled to relief under Cleveland because the superseding indictment under which he was charged defined property under the mail and wire fraud counts to include licenses among other items. As a result, he said, his conviction was flawed since licenses are not property under the mail and wire fraud statutes. The indictment charged that Stewart’s schemes were designed to obtain money and property, including licenses and the retention of licenses, premiums from policyholders and customers, dividends, consulting and management fees, and an inflated sales price for the Summit National Life Insurance Co. Bartle agreed that “after Cleveland, it is now clear that fraudulently obtaining licenses from state regulators does not amount to a violation” of the fraud statutes. Stewart argued that even a possibility that the jury convicted him under the legally deficient theory mandates that his convictions be vacated. Bartle disagreed, saying many of the counts in Stewart’s conviction — including all of the money laundering charges — would survive a Cleveland challenge. And by their nature, Bartle said, the money laundering convictions showed that the mail fraud convictions were not based solely on the licenses. To convict Stewart of money laundering, Bartle said, the jury was required to find that the money identified in the counts was “derived from … mail fraud.” As a result, Bartle said, Stewart’s money laundering conviction “makes it clear that the jury found that money, not licenses, was an object of the scheme.” And since money is a proper object of a scheme to defraud under the mail and wire fraud statutes, Bartle said, “we are absolutely certain that the jury relied upon the legally correct theory to convict the defendant, and we will not set aside his conviction.” The three racketeering convictions also survive the Cleveland challenge, Bartle said, since the jury could never have convicted on those counts with just the licensing evidence. “At trial there was virtually no evidence regarding the obtaining or retaining of licenses. What little there was all referred to time periods before the time alleged in the superseding indictment,” Bartle wrote.

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