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United States v. Phua

United States District Court, D. Nevada

January 30, 2015

WEI SENG PHUA, et al., Defendants.


PEGGY A. LEEN, Magistrate Judge.

Before the court is Defendants' Joint Motion to Suppress Fruits of Search Warrant Pursuant to Franks v. Delaware (Dkt. #232) which was referred to the undersigned for a report of findings and recommendation pursuant to 28 U.S.C. § 636(b)(1)(B) and LR IB 1-4. The court has considered the Motion, the government's Response (Dkt. #230), Defendants' Joint Reply (Dkt. #300), the voluminous exhibits attached to the moving and responsive papers, as well as evidence adduced at an evidentiary hearing conducted December 15-18, 2014. For the reasons explained below, the court will recommend that the motion to suppress be granted.


I. Procedural History.

Defendants Wei Seng ("Paul") Phua and Darren Wai Kit Phua were initially charged in a criminal Complaint (Dkt. #1) on July 14, 2014. They were released on cash bonds with Pretrial Services supervision and other conditions following a detention hearing at their initial appearance. See Minutes of Proceedings (Dkt. #20).

On July 29, 2014, the grand jury returned an Indictment (Dkt. #86) charging Defendants with one count of transmission of wagering information in violation of 18 U.S.C. § 1955, and one count of operating an illegal gambling business in violation of the laws of the State of Nevada, and aiding and abetting in violation of 18 U.S.C. § 2. The indictment alleges that not later than June 6, 2014, and continuing through July 9, 2014, the Defendants aided and abetted each other and others known and unknown in the business of betting and wagering by knowingly using a wire communication facility for the transmission in interstate and foreign commerce of bets and wagers, information assisting in placing bets and wagers on the World Cup soccer tournament in violation of 18 U.S.C. § 1084(a) and 18 U.S.C. § 2. Count Two alleges that beginning no later than June 6, 2014, and continuing through July 13, 2014, the Defendants aided and abetted each other and others known and unknown in conducting and financing, managing, supervising, directing and owning all or part of an illegal gaming business involving sports betting in violation of the laws of the State of Nevada. The sports betting business involved five or more persons, remained in continuous operation for a period in excess of thirty days, and had a gross revenue of $2, 000 in any single day in violation of 18 U.S.C. §§ 2, 1955. The indictment contains forfeiture allegations.

Briefing of this motion was delayed while the parties attempted to resolve the case against all of the Defendants by plea negotiation. After the joint motion to suppress was filed, five of the eight Defendants charged in the initial criminal Complaint (Dkt. #1) reached plea agreements with the government, waived indictment, and pled guilty to a misdemeanor Superseding Information (Dkt. #325). The government did not seek an indictment against a sixth Defendant initially charged in the criminal complaint.

II. Defendants' Joint Motion to Suppress.

The motion to suppress was jointly filed on behalf of all of the Defendants initially charged in the complaint. As indicated, five of the Defendants pled guilty and have now been sentenced. The Phuas, father and son, are the only remaining two Defendants. During a status and scheduling conference conducted December 12, 2014, before the December 15, 2014, evidentiary hearing, the court addressed how the motion to suppress had been narrowed as a result of the pleas. The initial motion challenged warrantless entries into three villas at Caesars Palace occupied by the Defendants charged in the original complaint-villas 8881, 8882, and 8888. It is undisputed that the Phuas occupied villa 8882. At the status conference, counsel for the Phuas conceded that they had no standing to challenge warrantless intrusions into the two other villas, and the companion Motion to Suppress (Dkt. #229) addressed only two warrantless intrusions into villa 8882 on July 4 and 5, 2014.

This motion to suppress argues that the fruits of the search of villa 8882 must be suppressed because the warrant application contains significant misstatements that were either intentionally or recklessly made to the issuing magistrate judge. Specifically, the affidavit contains false or misleading statements that the residents of the three villas were associated with each other, requested and used a large amount of computer equipment and support, and transferred millions of dollars among each other. The Defendants maintain that the government acquired all evidence suggesting any illegal sports betting was occurring in villa 8882 by warrantless searches. The warrant application misled the magistrate judge into believing the warrantless searches were constitutional and did not disclose that the probable cause recited in the affidavit was not lawfully-acquired. The warrantless intrusions led directly to other evidence cited in the application. For example, the initial intrusion into villa 8882 to determine if the residents were using DSL to connect to the internet occurred in the media room where the wireless router was located. Serious misrepresentations in the warrant application hid the likely unconstitutionality of the government's warrantless intrusions into the villas and deprived the magistrate judge from determining whether the application was based on legally-acquired evidence.

Defendants also argue that the warrant application created the false impression that the villas' residents voluntarily consented to searches, experienced genuine internet outages, and called for technical assistance. The application falsely represented that government agents entered the villas for the ostensibly legitimate purpose of repairing the internet connection when, in fact, agents knew that the DSL connection could only be restored outside the villa itself.

Defendants also contend the application falsely represented that agents saw evidence of sports betting in plain view during the course of their legitimate activities in the villa and that agents acquired relevant evidence in the course of legitimately dropping off a laptop requested by the residence of villa 8882. The application failed to disclose to the issuing magistrate judge that Wood and SA Lopez defied the butler's instruction to remain in the butler's pantry and entered the villa in violation of the Fourth Amendment. The application also falsely stated that Wood was fearful for his safety and was too afraid to accompany SA Lopez on a subsequent entry into villa 8882. A video of Wood's interaction with the butler taken on July 4, 2014, and produced by the government in discovery reveals this claim is false.

The motion maintains that government agents went to great lengths to conceal their scheme to interrupt the internet access to the villa to gain entry and that the timing and contents video recordings of the intrusions create the impression that the outages were genuine. Had the magistrate judge known the actual facts, the application for a warrant to search all three villas would have been denied because the warrantless intrusions in the villas raised Fourth Amendment problems. First, the government's scheme impermissibly targeted the villas' residents without a reasonable basis to believe they were engaged in illegality. Second, the residents did not consent to giving up their privacy and were induced to admit the agents into the villas. Third, the agents exceeded the scope of any consent by entering the villas unnecessarily and remaining there after the internet connection had been restored.

Based on these serious misrepresentations and omissions about the warrantless intrusions, which were the only source of evidence suggesting any illegal activity was occurring in villa 8882, the fruits of the search warrant must be suppressed. The motion claims that the search warrant application made intentionally or recklessly false statements in an effort to link the residents of 8882 to a supposed illegal sports betting operation. The affidavit contained multiple references to the occupants of all three villas as "associates" of Defendant Paul Phua, and tried to create the impression that the group existed and was operating a gambling ring. However, Defendants claim that these representations were grossly misleading as there was no such group of "Phua associates, " and the government had no basis to represent to the issuing magistrate judge that illegal activities were linked or that Phua was orchestrating them.

To the contrary, Defendants maintain the agents knew these representations were misleading because they had documents in their possession showing that: (1) Paul Phua's arrest in Macau had nothing to do with allegations in this case; (2) Yong made reservations for villas 8881 and 8882, but not 8888, and he transferred money to his own Caesars account, which Caesars required him to do to receive a line of credit; (3) the residents of villa 8888 requested the installation of computer equipment for their villa alone; (4) the residents of villa 8882 requested a laptop and reported an outage in their DSL service because the government had disconnected it; and (5) numerous other individuals, most of whom had nothing to do with this case, shared their casino credit lines and did not transfer funds between themselves.

The affidavit falsely stated that an unidentified "associates" of Paul Phua reserved all three villas and that the residents of the villas arrived close in time to each other. In fact, the principal resident of villa 8888, Hui Tang, made his own arrangements with Caesars and arrived several days later than the warrant application claims. The warrant omitted evidence that would have contradicted the contention that the residents of all three villas were operating a sports book together, for example, that no one reported anything suspicious about villa 8881 or villa 8882. The Defendants maintain that Caesars' records provided strong evidence that the residents of the three villas were not operating a sports book together. Specifically, these records show the residents watched the World Cup in their own separate villas, and the residents of 8881 and 8882 socialized relatively rarely with residents of villa 8888.

The warrant falsely represented that a large amount of computer equipment was requested in all three villas by "Phua and his associates." The application is grossly misleading in claiming that eight separate internet lines were installed, and by omitting the fact that the only unusual amount of computer equipment was in villa 8888 and was installed at the request of that villa's occupants. Caesars installed a single line in each of the six villas in the building, including three villas whose occupants were unrelated to this case.

The agents were working with Caesars' DSL contractor, Wood TMS, and knew by July 4, 2014, that Caesars had decided to install DSL internet service in each villa as an alternative means of internet access because of pervasive problems with the internet service provided by Cox Communications. The installation of a single DSL line in 8882 did not signify any unusually large amount of internet traffic, and there was no evidence that the residents of 8882 made any unusual requests for equipment or technical support. Nevertheless, the warrant application states that Wood told the agents that he "had never previously received any request for such a large amount of equipment and technical support as that which had been requested by Subject Premises 1-3's occupants." This was a false statement. The agent's notes reflect that during the government's interview of Wood, he referred to a request to connect five computers in villa 8888 to the DSL. The affidavit was misleading in failing to mention that Caesars provided law enforcement with the results of its own view of the villas, which showed only a single isolated computer in villa 8882 and none in villa 8881.

The motion also argues that the affidavit falsely described the financial transactions among the residents of all three villas in an attempt to draw an association among them. The affidavit described deposits to Caesars and transactions between Phua and his associates through Caesars which grossly distorted the nature of those transactions. For example, the application stated that an unknown Phua associate wire-transferred approximately $4 million in U.S. dollars from an originating bank account in the Bank of China into Yong's Caesars account, creating the impression that the deposit was a transfer between two different people. The affidavit stated that Phua recently deposited four certified checks totaling $4 million from an originating account at the Bank of China. Both were false representations. Both transfers were from Yong to himself, and Phua had nothing to do with either one. Additionally, there is nothing suspicious about gamblers transferring money to their casino accounts. "Front money" deposits are common, and the casino frequently requires a deposit to extend credit. The application omitted references to these facts and attempted to characterize the deposits as suspicious.

The application also grossly distorted the alleged "transactions" between Phua's associates to suggest that the residents were sharing funds related to wagers "rather than merely betting against the casino." The actual records the government had showed there were no "transfers, " and no money changed hands. In this case, the only person with money on account at Caesars was Defendant Yong. Caesars' records reflect that when Yong transferred funds from his front money deposit to pay for the "buy ins" of two poker players in a World Series of Poker event, Caesars documented its extensive approval process. In reality, each of the transactions cited by the government involved nothing more than one person vouching for the credit of another by sharing part of the Caesars credit line by transferring a casino marker. Sharing credit lines is evidence that the residents were engaged in gambling, but is not evidence of illegality.

The application represents that Phua transferred $3 million to Gyouye Huang. Huang was a guest in villa 8882. Caesars' record actually indicates "signed marker MKR for $3Mil trans to 4266598 [Huang Caesars player number] Chen Husan per MG/Bing." The search warrant application omitted reference to the fact that that it is common for gamblers to share credit lines and that specific individuals involved in this investigation had done so in prior years on prior gambling trips. Even assuming the agents were "confused, " confusion is not probable cause, and the credit line was not fairly characterized to the issuing magistrate judge. For all of these reasons, the fruits of the search of villa 8882 must be suppressed.

III. The Government's Response.

The government opposes the motion, acknowledging that a number of mistakes were made in the warrant application. The government argues that the affidavit in this case, once corrected and supplemented, would be sufficient to support a finding of probable cause, and suppression is therefore not required.

The government contends that the investigation and Caesars' records reviewed during the course of the investigation established the relationship between the occupants of all three villas. All three reservations for 8881, 8882, and 8888 were made through the same casino host. Paul Phua reserved Salon 7 for exclusive use by him and his associates. Hotel registration information provided by Caesars indicated Phua and his associates checked in and out of Caesars during the relevant period. Some of the butler logs showed interaction among the occupants of the villas. The government disputes that the occupants would need to regularly visit each other to run a book-making operation because the Defendants were aware that there was a main room where they were running their illegal sports betting business in villa 8888. The government also argues that the Defendants could operate the business remotely from wherever they had access to the internet, and it has evidence of instant messaging applications and skype chats recovered from Paul Phua's computer and phone, as well as Darren Phua's phone in villa 8882, presumably recovered pursuant to the search warrant. The government also support this argument with other evidence recovered as a result of the search warrant challenged in this motion.

The opposition concedes that the affidavit could have been more accurate by reflecting that there was a request made for five, rather than eight, DSL lines for villa 8888. However, the government argues that this error is immaterial. The government claims that with the exception of two "inadvertent and immaterial factual errors, " the affidavit accurately characterized significant financial transactions among the residents of the three villas. After the search warrant was executed, SA Pham learned of two misstatements in the affidavit. First, paragraph fifteen of the affidavit stated Phua recently deposited four checks totaling $4 million from an originating account at the Bank of China in Macau with the Caesars to secure a marker. This was incorrect because it was Seng Chen Yong who deposited the four checks. A portion of paragraph sixteen stated that Boonchai Kasamvillas transferred $3 million to Herman Chun Sang Yeung. This was incorrect; Kasamvillas actually transferred $3 million to Chuchai Waraporn. The government argues that these later-discovered errors were not intentional, reckless, misleading, or material to issuance of the warrant. The remaining transactions referenced in the affidavit were accurate and reflected financial transactions that occurred between May 9, 2014, and June 27, 2014.

Defendants are not entitled to bolster their arguments that there is nothing suspicious about the transfers with expert reports that were not part of the historical facts known to the agents at the time they applied for the search warrant. The government also challenges the expertise of the expert preparing the report concerning the financial transactions, asserting the expert is not an expert on financial transactions or junkets. The opposition points out that the experts have been paid for their services, presumably to assert they are biased.

The government argues that law enforcement officers are entitled to use their training and experience to draw limited inferences of criminal activity from behavior that is not facially criminal. The government disputes that it failed to inform the issuing magistrate judge of unlawful entries into the villas. The government's position is that the occupants of the villas consented to the entries although law enforcement used trickery or deception to gain entry. The government relies on a line of cases that have upheld searches in which law enforcement officers or individuals working with them gain consent to enter through use of trickery or deception. The government cites an Eight Circuit case which held that one who consents to an undercover agent's entry into his house has no legally-enforceable expectation that the agent is not an undercover police officer, and therefore, the warrants obtained with information gained from the warrantless deceptive entries were not tainted by any illegality. See United States v. Wagner, 884 F.2d 1090 (8th Cir. 1989). In short, the government maintains that information learned from the warrantless intrusions into villa 8882 that were prompted by law enforcement's disruption of the DSL service was lawfully-obtained.

The government concedes that the information regarding the ruse was not, and should have been, included in the warrant application. However, the government maintains that the failure to include information about the ruse does not "equate to an attempt to recklessly or deliberately mislead the magistrate judge." The opposition argues that the application omitted reference to the ruse was because: (1) at the time the agents applied for the search warrant, they believed the technique was protected; (2) the search warrant was obtained during a live, timesensitive operation; and (3) the agents needed to protect the ongoing assistance of a civilian. The agents were aware that "one of the Defendants had just fled Macau after being arrested for similar offenses and had access to a personal Learjet" and learned after the arrest "that Phua and his associates had bribed their way out of Macau." The Defendants' access to "remarkable sums of money was a grave concern to law enforcement."

The government argues that even if the magistrate judge should have been told about the ruse used to gain entry into 8882, suppression is not required. Citing Ewing v. City of Stockton, 588 F.3d 1218, 1223 (9th Cir. 2009), the government maintains that the party challenging the warrant must show that the affidavit deliberately or recklessly made false statements or omissions that were material to a finding of probable cause. Once established, the false statements are purged from the affidavit, and the court determines whether the remainder of the affidavit sets forth probable cause. Similarly, if an officer omitted facts required to prevent the affidavit from being misleading, the court determines whether the affidavit, corrected and supplemented, establishes probable cause. If probable cause remains after amendment, no constitutional error was made. In this case, the affidavit purged of paragraphs thirteen and fourteen, and corrected with respect to the five DSL lines requested for villa 8888 and the monetary transfers, still established probable cause to justify the search warrants for all three villas. The government also argues that omission of reference to the ruses used to gain warrantless entries was not intentional, reckless, or material to the probable cause determination.

The government disputes that the representation in the affidavit that the DSL contractor provided SAs Lopez and Kung instruction on how to fix the DSL lines was false. The government acknowledges that the DSL was connected outside the villas and could only be fixed there. However, the DSL contractor did give the agents instruction on how to appear as legitimate technicians. At worst, the government argues, the affidavit was misleading by omitting the additional information about the ruse. As supplemented by information about the ruse, the search warrant affidavit "does not render paragraph 14 of the search warrant affidavit false, and it certainly has no bearing on the probable cause determination." Thus, this omission was not material.

The government also argues that even if the court determines that the application should have informed Magistrate Judge Koppe about the ruse, and if that information had an impact on her probable cause determination, the evidence should still not be suppressed because it would have been inevitably discovered. The inevitable discovery doctrine is an exception to the fruit of the poisonous tree doctrine for which, as the government acknowledges, it bears the burden of establishing by a preponderance of the evidence. Here, the agents could have obtained a search warrant for all three villas without ever initiating the ruse based upon the information they had. The government had sufficient evidence of possible criminal activity prior to disrupting the DSL service to the three villas based on "the assistance of the Defendants and their willingness to share their criminal activities with Caesars personnel." Evidence of possible criminal activity was only strengthened when the occupants of villa 8882 requested a courtesy laptop to be delivered by the DSL contractor, which gave SA Lopez and the DSL contractor an opportunity to hear sounds "consistent with the World Cup game being watched there." The fact that watching a soccer game is not illegal "fails to account for and consider the information already known to law enforcement prior to delivering the laptop, or the fact that the agents had sufficient probable cause to obtain search warrants for crimes related to unlawfully operating the sports betting operation and illegal transmission of wagers." The warrants could have and would have been obtained without disrupting the DSL service. The agents could have secured search warrants for all three villas without using a ruse. Thus, the same evidence would have inevitably discovered, and evidence recovered from the villas should not be suppressed.

IV. The Defendants' Reply.

The reply argues that the government misrepresented and omitted critical facts in the warrant application, either recklessly or to intentionally mislead the court. Specifically, the government characterized its "unprecedented covert operation that involved disrupting the DSL" as consensual searches; falsely claimed that the various Defendants were known members of the 14K Triad, an organized crime group, and were associates of each other; made suspicious requests for electronic equipment; and engaged in suspicious financial transactions. The Defendants maintain that all of these statements are provably false, and the government's opposition compounded its error by confessing to a few of them. The government's post-hoc attempts to rehabilitate the warrant application only highlights how flawed it is. Defendants maintain that "the government cobbled together wafer-thin evidence, much of which was unlawfully obtained-and then aggressively mischaracterized that evidence."

The warrant application provides no support for the conclusion that Paul Phua was known by law enforcement to be high-ranking member of the 14K Triad. This unsupported statement is recklessly false. The fact that the agents were aware that Phua was recently involved in a raid and arrest for his involvement in running a large-scale book-making operation elsewhere did not support a finding of probable cause and was not evidence that Phua was engaging in a violation of U.S. law in the villas at Caesars. The application made similar outrageously unsupported statements that law enforcement was aware that Defendant Yong was a member of the 14K Triad. In light of the lack of proof offered by government in its response, "one can only conclude that [the statements] were made recklessly or with intent to mislead." Falsely characterizing Defendants as known members of organized crime is a material misrepresentation.

The reply argues that the government not only concealed law enforcement's covert operation to disrupt the villas' internet, but also engaged in an extensive cover up by creating deceptive videos and false Form 302 reports so that its scheme would not be discovered. Caught red-handed, Defendants argue the government now concedes information about the ruse was not and need not have been included in the application.

Defendants assert there are at least five examples of the government misleading the issuing magistrate judge. First, Wood did not tell Lopez how to repair the internet connection, and it was impossible to repair the connection from inside the villa. Second, when Wood and Lopez arrived in villa 8882, the butler did not tell them the residents did not want anyone to see their "business." Third, the videotape of Wood and Lopez's entry made clear that Wood was not afraid for his safety. Fourth, the government's opposition falsely states that during the laptop drop off, Wood suggested entering the media room with a laptop. The videotape demonstrates that Lopez whispered, "Let's go, before he [the butler] gets back." Fifth, Wood did not see illegal sports betting odds in villa 8881. Defendants maintain Wood was too far away to see the a computer screen, and he had no basis to conclude the site was "illegal" because online sports betting on licensed websites is legal in Nevada, and reading odds from a computer screen is not a crime.

The reply disputes that law enforcement agents had legitimate good faith reasons for failing to disclose the ruse. The warrant application was under seal, so it is absurd to believe the ruse was not disclosed to protect a law enforcement technique. The government does not explain how a time-sensitive operation excuses a failure to disclose. The government could have protected Wood's identity without failing to disclose in the application that the DSL was disconnected, and the warrantless searches occurred after the service was already restored. Defendants maintain that all of these misstatements and omissions are material and were intended to convince the judge that the searches were consensual without disclosing "that the scheme here was entirely unprecedented in the entire history of American law enforcement." The government ...

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