8-03-2

By Eric Jones

On January 7, 2016, the Fourth Circuit issued a published opinion in the criminal case United States v. Martinovich.  At trial, Jeffrey A. Martinovich (“Martinovich”) was convicted of one count of conspiracy to commit mail and wire fraud, four counts of wire fraud, five counts of mail fraud, and seven counts of money laundering.  On appeal, Martinovich argued that the district court’s frequent interruptions and interferences at trial deprived him of a fair trial, and that the treatment of sentencing guidelines as mandatory led to an excessive sentence.  The Fourth Circuit affirmed his conviction in part, vacated in part, and remanded for resentencing before a different judge.

The Investment Firm Fraud

In 2005, Martinovich became the sole owner and CEO of MICG, a financial services company that provided investment services to clients.  In November of 2006, MICG formed MICG Venture Strategies, LLC (“Venture Fund”) as a hedge fund for MICG’s clients to invest in EPV Solar, Inc., a privately held solar energy company.  Martinovich was given a managerial role in the Venture Fund, and had sole authority for investment decisions, asset valuations, incentive allocation, and management fees.  Martinovich received a 1% management fee and 20% incentive fee based on the Venture Fund’s performance.  Determining the value of the management and incentive fees owed to Martinovich required an independent valuation of the EPV shares held by the Venture Fund.

Despite the requirement of independent valuations, Martinovich had an EPV shareholder and consultant perform a valuation by misleading him into thinking the valuation was only to be used internally at EPV.  Based on this valuation, Martinovich took an incentive/management fee of $357,019 for end-of-year 2007.  Through 2009, Martinovich personally and consistently inflated the value of EPV shares and other assets held by the Venture Fund in order to justify increased incentive and management fees.  Additionally, Martinovich “(1) sought unsophisticated investors; (2) failed to disclose EPV’s dire condition; (3) misinformed investors about their redemption ability; and (4) used new investment money to pay other investors.”  In October of 2012, Martinovich was charged with conspiracy to commit mail and wire fraud and multiple counts of mail and wire fraud.

The District Court’s Interruptions

At trial, the district court “frequently interrupted counsel and questioned counsel’s tactics.”  For example, at one point the court asked Martinovich’s counsel to clarify his line of questioning.  When he attempted to do so, the court interrupted saying “[n]o, don’t say anything.”  When counsel responded “[y]ou asked me why,” the court answered “I did, and I made a mistake.”  On another occasion, the district court “criticized [Martinovich]’s counsel for developing a sequential timeline. Shortly thereafter, however, the district court reproached [Martinovich]’s counsel for proceeding in a non-sequential manner.”  The district court additionally interrupted the presentation of evidence.  For example, defense counsel, addressing a witness, said “[a]nd why is the date-” when the court interrupted, asking “[s]top. Have we got a date when this all took place?”  Defense counsel responded “[t]hat’s what I’m asking him.”  At times, the district court even attempted to move forward in time and interfered with the defense’s presentation, interrupting repeatedly to ask if they could move from discussing events in 2005 and “get to somewhere near here, get up to 2007.”  When defense counsel responded that they were getting there, the court answered “[w]ell, get there.  Excuse me.  I want to get there, okay?”  At no point during trial did Martinovich’s counsel object to any of the district court’s comments, questions, or disruptions.

The Sentencing Guidelines

At sentencing, the district court stated numerous times that “it viewed the Guidelines as mandatory and that its discretion was restricted to a sentence that fit within the range set forth in the Guidelines.”  Counsel for both Martinovich and the Government repeatedly argued that the Guidelines were merely advisory and not mandatory, but the district court refused to agree.  Despite expressly acknowledging that “the Supreme Court indicates that they are advisory,” the court continually stated that “I will follow the guidelines only because I have to.  I find that they’re not discretionary, they’re mandatory.”  The court even stated that “[t]he sentences now are draconian” in reference to the Guidelines.  Confronted with a Guideline range of 135-168 months, the district court sentenced Martinovich to 140 months.

The Standard for Judicial Interference

Because Martinovich did not timely object at trial, the alleged judicial interference was reviewed only for plain error.  Even after finding plain error, the Fourth Circuit explained, for the convictions to be overturned, “the error must be so prejudicial that it affected [Martinovich]’s substantial rights, i.e., it had to change the outcome of the trial.”  The Circuit held that although the district court crossed the line and was in error, Martinovich was not deprived of a fair trial, and thus the convictions must be affirmed.  The Fourth Circuit held that the trial record was “replete with the district court’s ill-advised comments and interference,” and stated that “[c]onsidering the breadth of the district court’s actions, from questioning witnesses and counsel to interrupting unnecessarily, we find that the district court strayed too far from convention. Ultimately, we find the district court’s actions were in error.”

As to the second prong, however, the Circuit concluded that the error did not prejudice Martinovich.  The Fourth Circuit primarily based this holding on the plain error standard of review, which is extremely deferential.  The Court held that “although the district court’s interferences in this case went beyond the pale, in light of the plain error standard of review and the overwhelming evidence against [Martinovich], the district court’s conduct did not create such an impartial and unfair environment as to affect [Martinovich]’s substantial rights and undermine confidence in the convictions.”

The Standard for Criminal Sentencing

The Fourth Circuit first explained that criminal sentences are reviewed for abuse of discretion.  The Circuit further stated that “[u]pon a finding of a procedural error, the error shall be subject to harmlessness review.”  “When a district court has treated the Guidelines range as mandatory, the sentence is procedurally unreasonable and subject to vacatur” if the resulting sentence is longer than the defendant would otherwise be subject to.

After concluding that significant procedural error had occurred, the Circuit Court explained that “had the district court considered the Guidelines as discretionary, [Martinovich]’s sentence may have been lower.”  The Court pointed to several instances where the district court expressed concern that the Guidelines set too high a sentence, and did not consider Martinovich’s “good character.”  This, the Fourth Circuit held, left them “obliged to vacate [Martinovich]’s sentence and remand for resentencing.”

The Fourth Circuit Affirmed in Part, Vacated in Part, and Remanded

Because the evidence against Martinovich was overwhelming, the Fourth Circuit affirmed his convictions despite the repeated interruptions and interference by the trial court.  Because Martinovich likely received a lengthier sentence than he otherwise would have if the trial court had treated the Guidelines as advisory and not mandatory, the Circuit reversed the sentence and remanded for further sentencing proceedings.  Finally, because the Circuit feared that “remanding the case to that court with our own reminder of the correct law would most likely be an exercise in futility,” because of the trial court’s repeated misunderstanding of the advisory nature of the Guidelines, the Circuit ordered that the further proceedings occur before a different judge.

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