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United States v. Ganos

United States District Court, E.D. Wisconsin

February 28, 2019

UNITED STATES OF AMERICA, Plaintiff,
v.
BRIAN GANOS, MARK SPINDLER, SONAG COMPANY, INC., and NUVO CONSTRUCTION COMPANY INC., Defendants.

          ORDER ADOPTING JUDGE JONES'S RECOMMENDATION (DKT. NO. 80), AND DENYING DEFENDANT BRIAN GANOS'S MOTION TO SUPPRESS EVIDENCE (DKT. NO. 39)

          HON. PAMELA PEPPER, UNITED STATES DISTRICT JUDGE.

         Defendant Brian Ganos filed a motion to suppress evidence obtained from the execution of two search warrants. Dkt. No. 39. The government filed identical affidavits in support of the two warrants; one warrant authorized the search of the home office of the accountant for the defendant's businesses and the other authorized the search of an office building owned by a holding company owned by the defendant (but used by other businesses). Dkt. Nos. 39-1 and 39-2. In his suppression motion, the defendant argued that the warrants lacked probable cause, and that the affidavits misrepresented the informant's opinions as facts and failed to disclose that the informant took some of the business records summarized in the affidavits without authorization, and possibly at the direction of investigators. Dkt. No. 39 at 1-2. At a hearing in September 2018, Magistrate Judge David Jones denied the defendant's request for an evidentiary hearing, concluding that he had all the evidentiary material he needed to resolve the motion. Dkt. No. 68 at 2. He also concluded that there was no evidence of reckless disregard for the truth, and so found no need for a Franks hearing.[1] Id. at 2. In his November 2018 report and recommendation, Judge Jones concluded that the defendant lacked standing to object to the search of some of the areas the agents searched. Dkt. No. 80 at 8-9. To the extent that the defendant had standing to challenge the search of other areas, Judge Jones found that the affidavits provided probable cause for him to sign off on the warrants. Id. at 15. Finally, Judge Jones concluded that even if the affidavits had not established probable cause, the officers who executed the warrants relied on them in good faith. Id. The defendant timely objected to those conclusions. Dkt. No. 84. The court overrules the objection, adopts the recommendation and denies the motion to suppress.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         The motion asks the court to exclude “all evidence obtained by the government from the execution of search warrants at 5500 W. Florist Avenue in Milwaukee and W147 N5146 Dolphin Drive in Menomonee Falls that were authorized on July 29, 2016.” Dkt. No. 39 at 1.

         A. Factual Background

         The warrant applications sought authority to search the two locations for evidence relating to a conspiracy to defraud the United States; false statements; major fraud against the United States; fraud by wire, radio or television; money laundering; and offenses against the Small Business Administration (referred to in the application by its acronym, SBA). Dkt. No. 39-1 at 1.[2]

         In the extensive affidavits, the affiant attested that the defendant became the owner and president of Sonag Co., Inc., a general contractor located in Milwaukee, Wisconsin, in 1992. Id. at ¶25. As a Hispanic male, the defendant qualified as a disadvantaged individual for purposes of obtaining government set-aside contracts through the SBA's Section 8(a) Program. Id. at ¶¶12, 25. The affiant attested that when Sonag graduated from the program in May 2003, the defendant-with assistance from project manager James Hubbell-pursued a scheme to defraud the United States by obtaining 8(a) and Service Disabled Veteran Owned Small Businesses (SDVOSB) set-aside government contracts to which he was not entitled. Id. at ¶¶ 25-26. The defendant and Hubbell allegedly did this by recruiting individuals who qualified as disadvantaged individuals to serve as the purported owners of newly formed construction companies. Id. ¶26. The affiant asserted that the defendant and Hubbell controlled these newly-formed companies-Nuvo, Pagasa and C3T-which allowed them to financially benefit from contracts that Sonag Co. Inc. was not eligible to receive. Id. The affiant stated that the defendant, with assistance from Hubbell, received 8(a) set-aside contracts valued at approximately $197 million. Id. at ¶29.

         The affidavit states that the building on Florist Avenue housed three entities-Sonag, Nuvo and C3T. Id. at ¶28. At the time the affidavit was submitted, the defendant was president and minority shareholder of Sonag and vice-president and minority shareholder of Nuvo. Id. at ¶8A. The affidavit alleges that the building was owned by Sonag I, LLC, a property management company owned by the defendant. Id. at ¶39.

         The affiant explained that CS-1 had approached law enforcement in 2014. Id. at ¶31. The affiant represented that CS-1 had worked for Sonag and Nuvo for fourteen years, and that this employment “gave him/her an intimate knowledge of specific contract details, office culture, and financial transactions.” Id.

         CS-1 reported that the defendant had approached Jorge Lopez, a Sonag project manager, when Sonag was graduating from the 8(a) program and asked Lopez to become president of Nuvo. Id. ¶32. At the time, Lopez was suffering personal financial hardship and “may have been on the verge of losing his residence” and agreed to become president. Id. According to the affiant, Wisconsin Department of Financial Institutions (DFI) records showed that in March 2001, Lopez changed the name of Insulation Masters, Inc.-a company he owned-to Nuvo, and the defendant had become a 15% minority owner. Id. at ¶33. When Lopez submitted Nuvo's initial SPA 8(a) program application, the affiant attested Lopez said that he had an 85% ownership interest and that 100% of his hours were devoted to the firm. Id. at ¶34.

         The SBA allowed Nuvo to bid on 8(a) projects based on a business plan listing Lopez as the 85% owner and full-time manager with an annual salary of $48, 000, while reflecting that the defendant, as 15% owner, received no salary at all. Id. at ¶35. Although the program materials listed Lopez as Nuvo's president, majority owner and full-time manager, Hubbell managed the company's affairs. Id. at ¶¶ 34-65. CS-1 reported that shortly after Nuvo received its 8(a) status, Lopez moved to Worthington, Minnesota with his family. Id. at ¶40. The affiant reported that the government's investigation had corroborated that Lopez lived in Minnesota and worked for another company while he purported to the be the manager of Nuvo. Id. at ¶41. Lopez's tax returns confirmed that he moved to Minnesota in 2004; his 2007, 2009 and 2010 tax returns listed Worthington, Minnesota as his address. Id. at ¶42. His Minnesota license and renewal applications in 2006, 2010 and 2014 reported his home address as Worthington, Minnesota. Id. at ¶43. Employment and telephone records confirmed that he worked for another employer in Minnesota. Id. at ¶¶44-46.

         The affiant explained in detail how financial records indicated that Lopez hid income from his Minnesota employer by transmitting it through Nuvo's business checking account. Id. at ¶47. From 2005 to 2012, as part of Nuvo's annual reports to the SBA, Lopez reported compensation from Nuvo but none from his other employer. Id. at ¶49. The affiant stated that CS-1 reported Lopez exercised no control over Nuvo and rarely visited but kept personal effects and papers on his desk in Milwaukee so that it would look like he was controlling Nuvo. Id. at ¶52. CS-1 explained that Hubbell-not Lopez-managed Nuvo. Id. at ¶54. A second former Nuvo employee, who had worked at Nuvo from late summer 2013 to spring 2014, corroborated CS-1's statements. Id. at ¶53. Although SBA forms indicated that the defendant received no income from Nuvo and had no access to Nuvo's bank accounts, IRS and property records indicated that the defendant and his wife received a salary from Nuvo and that Nuvo paid for lakefront property and remodeling projects at their residence. Id. at ¶¶59-65.

         According to the affiant, CS-1 reported that after establishing Nuvo, the defendant and Hubbell wanted to create a SDVOSB to benefit from the government set-aside contract program through the V.A. Id. at ¶71. They placed Telemachos Agoudemos, a service-disabled veteran, to serve as president and majority owner of C3T, Inc. Id. at ¶71. The DFI reported that the defendant owned C3T until April 3, 3006, when he transferred-for free-51% of the company's stock to Agoudemos and 49% to Hubbell as vice president. Id. at ¶74. In April 2006, Hubbell registered C3T as a self-certified SDVOSB, which allowed the company to bid on set-aside government contracts. Id. at ¶75. Although Agoudemos was listed as the owner of C3T, the affiant stated that the company was controlled by the defendant and Hubbell. Id. at ¶¶ 71-98. Like Sonag and Nuvo, C3T was located in the Florist Avenue office building. Id. at ¶ 72. From 2006 through 2016, C3T received about $197 million in SDVOSB set- aside contracts. Id. at ¶99. As of July 2016, the company still was participating in the SDVOSBP and was being awarded government set-aside contracts. Id. at ¶102.

         According to the affiant, the defendant, as a former participant in the 8(a) program, could not be a majority owner of a different 8(a) company. Id. at ¶105. The defendant chose Odessa Millan, an Asian-Pacific American woman who meets the social and economic requirements to be a Section 8(a) participant (and was a former project manager for C3T) to be president and purported owner of Pagasa Construction Company, Inc. Id. at ¶106. To establish the required work history to gain Section 8(a) status, Sonag, Nuvo and C3T listed and paid Pagasa for subcontractor work that the three companies performed themselves. Id. at ¶¶111-15. Pagasa obtained its Section 8(a) certification in September 2015; as of July 2016, it had not been awarded any Section 8(a) set-aside federal government contracts. Id. at ¶117. In the fall of 2015, Pagasa moved into the Florist Avenue building. Id. at ¶119.

         CS-1 reported that an individual named Lori Michaud, an independent contractor, performed all accounting functions for Sonag, Nuvo and C3T and had work space in the Florist Avenue office building, although public records indicated that her accounting business operated out of her home on Dolphin Drive. Id. at ¶¶122, 129. The affiant attested that Michaud “ha[d] control over the entire general ledger function and the financial accounts for all of the referenced companies, which enable[d] her to transfer profits from job to job and company to company within the job-cost software.” Id. at ¶127. Law enforcement surveilled the Florist Avenue building and saw Michaud coming in around 8:00 a.m. every day and leaving daily around 4:30 p.m. Id. at ¶124. Agents interviewed Michaud in October 2012; she told them that she had helped Hubbell and Agoudemos set up C3T. Id. at ¶125.

         On July 29, 2016, Judge Jones approved the warrants. Case Nos. 16-MJ-98 and 16-MJ-99, Dkt. No. 2. Law enforcement agents executed them on August 3, 2016. Id. They recovered items from the Florist Avenue office building but did not seize anything from Michaud's home office. Case No. 18-cr-62, Dkt. No. 80 at 6.

         B. The Defendant's Arguments

         The motion asserted that the affidavits supporting the search warrants lacked probable cause because they did not provide the magistrate judge with enough information to assess the credibility of CS-1. Dkt. No. 39 at ¶¶7-9. A single paragraph in the affidavits identified CS-1 as someone who had been employed by Sonag and Nuvo for approximately fourteen years, “which gave him/her and [sic] intimate knowledge of specific contract details, office culture, and financial transactions.” Id. at ¶4. The defendant argued that the affidavits did not identify CS-1's position in Sonag or Nuvo, which would have allowed the magistrate judge to decide whether CS-1 was in a position to know the things he/she told law enforcement. Id. at ¶7.

         Next, the defendant argued that the affidavits represented as proven facts information that CS-1 had provided to the agents as “beliefs, ” or events that had “reportedly” occurred. Id. at ¶10. The defendant asserted that the way the affiant worded the affidavit made it seem as though these “beliefs” or “reports” were established facts. Id. He also contended that while the affidavits stated that “CS-1 reported, ” or “CS-1 believed” certain information, the investigator's reports memorializing their interviews with the informant used a passive formulation such as “it is believed, ” implying that had Judge Jones known this, he might have questioned whether the information attributed to CS-1 actually came from CS-1, and whether it was based on CS-1's personal knowledge. Id. at ¶¶12-13.

         The defendant also theorized that “[t]he affidavit's reliance on documents provided by [CS-1] suggests that the guiding hand of government agents [was] directing the informant to purloin specific internal, non-public company records for their use in establishing probable cause.” Id. at ¶14. He pointed out that CS-1 provided investigators with emails, financial records and internal accounting records; because the defendant does not know who CS-1 is, however, or what position he/she holds with Sonag or Nuvo, the defendant argues that he “cannot know whether the confidential informa[nt] was an intended recipient of the emails or whether his access to the non-public company records was authorized.” Id. The defendant asserts that the fact CS-1 was meeting with government investigators, coupled with the informant's production of increasingly specific information, “strongly suggests that investigators directed the confidential informant to obtain information and to report about the existence of records that substantiated the investigator's suspicions.” Id. at ¶¶14-18. He asserts that knowing whether CS-1 was gathering documents at the direction of investigators, and whether CS-1 was gathering documents that he/she would not have had access to in his/her position, would have mattered to the issuing magistrate judge's determination as to CS-1's credibility. Id. at ¶19.

         Finally, the defendant argued that the good faith exception could not save the warrants, citing United States v. Harris, 464 F.3d 733, 740 (7th Cir. 2006) for the proposition that the good faith exception does not apply where “the officer seeking the warrant was dishonest or reckless in preparing the affidavit.” Id. at ¶22.

         C. The Government's Response

         The government first objected to the defendant's request for an evidentiary hearing on the motion, asserting that the defendant had not complied with Criminal Local Rule 12(c) because defense counsel never conferred with the government regarding any material disputed facts and had not provided a description of the material disputed facts. Dkt. No. 49 at 2. The government also argued that even if the defendant had complied with the local rule, the motion did not raise any disputed material facts that presentation of evidence would help resolve. Id. at 2-4. The government contended that the defendant's arguments amounted to speculation, and that the issue the defendant raised-whether the informant's information was reliable-was a decision Judge Jones could make from the face of the affidavit. Id. As the court has noted, Judge Jones agreed, and declined to hold an evidentiary hearing. Dkt. No. 68.

         As to the merits of the motion, the government began by asserting that the defendant lacked standing to challenge the search of the Dolphin Drive residence, because that residence belonged to Lori Michaud-not the defendant. Dkt. No. 60 at 4. In a similar vein, the government argued that the defendant had failed to establish that he had any privacy interest in parts of the Florist Avenue building. Id. The government conceded that the defendant owned Sonag I, LLC, the property management company that owned the building, but contended that this did not give him a legitimate expectation of privacy in office spaced occupied by companies other than his own. Id. The government argued that while it believes it will prove that the defendant controls Nuvo, C3T and Pagasa, the defendant claimed only a minority stake in Nuvo and denied any ownership interest in C3T or Pagasa. Id. at 5-6. The government asserted that even as to Sonag Co. and Nuvo, the fact that the defendant was an officer of those corporations did not mean that he had an expectation of privacy in the records of those entities. Id. at 6.

         The government also argued that the affidavits provided ample bases for the issuing magistrate to evaluate CS-1's credibility; the government pointed to the “extensive corroboration of CS-1's statement throughout the affidavit, ” and provided a table with examples. Id. at 8-11. The government dismissed the defendant's argument about the affiant representing “opinion” or “belief” as fact as the type of “hypertechnical nitpicking” that the Supreme Court has discouraged. Id. at 12 (citing Illinois v. Gates, 462 U.S. 213, 235 (1983).

         Finally, the government argued that the defendant failed to demonstrate that CS-1 was acting as a government instrument or agent. The government responds that CS-1 brought documents-unsolicited-to the first interview and was told to bring the documents back to the second interview, but brought no documents to the third interview. Id. at 14. The government also represents that it never directed CS-1 to collect documents and did not offer CS-1 a reward. Id. The government concluded by asserting that even without the documents obtained by CS-1, the affidavits still established probable cause. Id.

         II. JUDGE JONES'S RECOMMENDATION (DKT. NO. 80)

         In a sixteen-page report, Judge Jones recommended that the court dismiss the defendant's motion. Dkt. No. 80. Judge Jones agreed with the government that the defendant did not have a legitimate expectation of privacy in his accountant's accountan's home office or the entire Florist Avenue office building. Id. at 8. Judge Jones also noted that the challenge to the search of the Menomonee Falls home office appeared to be moot, because agents did not seize any evidence from it. Id. at 9. With respect to the Florist Avenue office building, Judge Jones concluded that the defendant had standing to challenge the search of the Sonag and Nuvo office spaces because of his interests in both companies. Id. Because the defendant had denied involvement with C3T or Pagasa, however, Judge Jones found that he did not have standing to challenge the searches of the office spaces of those entities. Id.

         As to probable cause, Judge Jones found that the totality of the circumstances demonstrated that CS-1 was reliable. He recounted that the affidavits indicated that CS-1 had worked for Sonag and Nuvo for fourteen years and had an extensive history with the defendant. Id. at 12. He pointed out how the information CS-1 provided was highly detailed and suggested personal involvement:

describing that Mr. Ganos sought out Mr. Lopez to gain Section 8(a) status for Nuvo; that Mr. Hubbell and not Mr. Lopez actually managed Nuvo; that Mr. Ganos provided the financial backing for Nuvo; that Mr. Lopez moved to Minnesota and had limited involvement in Nuvo; that Mr. Ganos and Mr. Hubbell invoiced work Sonag, Nuvo, C3T, and others performed on their personal residences through government contracts; that Mr. Ganos and Mr. Hubbell sought out Mr. Agoudemos to gain service-disabled-veteran status for C3T; that Mr. Agoudemos did not actually run C3T's day-to-day affairs; that Mr. Hubbell was removed from C3T's payroll, business structure, and office space after its eligibility was suspended to create the impression that he had no involvement in the company; that Mr. Hubbell nevertheless continued to control C3T; that Mr. Ganos sought out Ms. Millan to gain Section 8(a) status for Pagasa; that Mr. Ganos and Mr. Hubbell were in fact in control of Pagasa; that Mr. Hubbell sought to establish a sufficient work history for Pagasa so it could acquire Section 8(a) status; that Pagasa never actually performed any of the work paid for by Ganos-affiliated companies; that Ms. Michaud provided accounting services for Sonag, Nuvo, and C3T; and that Ms. Michaud played accounting gymnastics with the companies' finances. See Id. ¶¶ 32, 38, 40, 63, 71, 82, 92, 93, 105-06, 111, 116, 122, 127-28. Law enforcement independently corroborated most of this information. See Id. ¶¶ 25, 33, 39, 41-48, 53, 59-62, 64-65, 72-73, 74, 77-79, 83-85, 92, 94; 107, 110, 112-14, 116, 123-26, 128, 129.

Id. at 13. Judge Jones opined that two factors weighed slightly against the reliability of CS-1: the affidavits said that CS-1 approached law enforcement in 2014 but the government averred they met in December 2013, February 2014, and March 2014; and CS-1 did not personally appear before Judge Jones (who issued the warrants). Id. at 13. Judge Jones found that the strong showing in the amount of detail provided and the level of police corroboration overcame those concerns. Id.

         Judge Jones found less significant the affiant's failure to disclose CS-1's role at Sonag and Nuvo, stating that that information was not critical to his probable cause determination. Id. at 13-14. He also concluded that probable cause would have existed even if the affiant had included qualifying language indicating that certain information in the affidavits was the opinion or belief of the informant or agents. Id. at 14. Finally, as to the defendant's theory that the government may have unlawfully directed CS-1 to collect confidential records, Judge Jones found that the defendant offered nothing more than speculation to support that allegation. Id.

         Judge Jones concluded that even if the affidavits had failed to state probable cause, the executing officers relied on the warrants in good faith. Id. at 15. He found that the affiant “reasonably relied on information provided by CS-1, as well as several other sources, when seeking the warrant, ” and that she was not dishonest or reckless in preparing the affidavits. Id.

         III. ANALYSIS

         The defendant objects to Judge Jones's conclusions that he lacked standing, that the totality of the circumstances set out in the affidavits demonstrated probable cause and that the good faith exception applies. Dkt. No. 84.

         A. Stand ...


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