UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 95-21072
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
JERALD J. HENDRICKS; WILLIAM P. VERKIN, MICHAEL J. FRYE,
Defendants-Appellants.
Appeal from the United States District Court
For the Southern District of Texas
(CR-H-94-141)
May 15, 1997
Before GARWOOD, DeMOSS and PARKER, Circuit Judges.
PER CURIAM:*
William P. Verkin (“Verkin”), Jerald J. Hendricks
(“Hendricks”) and Michael J. Frye (“Fyre”) appeal their convictions
for conspiracy to commit bank fraud in violation of 18 U.S.C. § 371
*
Pursuant to Local Rule 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in Local Rule 47.5.4.
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and bank fraud in violation of 18 U.S.C. § 1344. For the following
reasons, we reverse.
PROCEEDINGS AND DISPOSITION BELOW
Verkin, Hendricks, Frye and Joseph Russo (“Russo”) were
charged in a two count indictment with bank fraud and conspiracy to
commit bank fraud. Russo pleaded guilty and testified against the
others. During trial, the district court granted a motion for
judgment of acquittal as to the first paragraph of Count One which
charged the defendants with conspiring to defraud the United
States, but denied a motion for acquittal on the remaining
paragraph which charged conspiracy to defraud a credit union. The
jury found Verkin, Hendricks and Frye guilty of both conspiracy and
bank fraud.
Verkin was sentenced to two consecutive two-year terms of
confinement. Frye and Hendricks were each sentenced to two
consecutive three-year terms of confinement.
FACTS1
This case involves two interrelated transactions; the
defendants’ purchase of 500 acres on I-45 in League City, Texas and
of a Coors Beer distributorship in San Antonio, Texas from
Burkett’s Distributing Company.
1
The record contains conflicting evidence about the exact amount
of some relevant figures. These discrepancies do not impact the
issues before this court. We therefore make no attempt to resolve
the discrepancies and use approximate figures in the recitation of
facts.
2
In November 1986, Verkin, a licensed real estate agent,
executed earnest money contracts for the League City acreage as
trustee for an undisclosed principal. The purchase price was $8.9
million, with a down payment of $1.5 million, and the remainder to
be financed by the owners, a group of related entities referred to
as the Campbell Estate. The land was valued at $32 million by
contemporaneous appraisals. Verkin later negotiated for 41 of the
500 acres of the land to be transferred free and clear.
In the summer of 1986, Pat Gooden, a business broker, alerted
Frye and Hendricks to the availability of the beer distributorship.
The distributorship was in default on $6 million in loans from the
Government Employee’s Credit Union (“GECU”) and had other
indebtedness of $4 million. Frye and Hendricks decided to buy the
distributorship and proposed refinancing the distributorship debt
through GECU and reallocating a portion of that debt to the League
City acreage. On February 5, 1987, GECU approved a $9,649,000 loan
for “down payment and contingency residual principal and interest
in connection with a work out loan for acquisition of Burkett’s
Distributing and acquisition of land in [League City], Texas.”
In February 1987 Verkin attempted to negotiate an agreement
with some members of the Campbell Estate whereby they would retain
an interest in the joint venture. That proposal was never
consummated. Instead, on February 24, 1987, Verkin entered a joint
venture agreement with George Beach III (“Beach”), his second
cousin and employee. The agreement required Beach “upon the
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request of Verkin [to] cause legal title to the Venture Property to
be conveyed to the Joint Venture.” The agreement gave Verkin an
option to purchase Beach’s interest in the venture and in the
League City property for $2.2 million. Hendricks, Frye, Verkin and
Russo entered into a second joint venture agreement, which noted
that Beach had conveyed his interest in the real estate to them.
At closing, Beach received $2.2 million, which he endorsed
back to the defendants’ joint venture, in return for a $5000
payment. Hendricks, Frye, Verkin and Russo then applied the loan
proceeds to the purchase price of the beer distributorship, the
real estate, the various expenses connected with the transactions
and a payment of $226,826 to each of the four defendants. The
$226,826 payments are the focus of this prosecution.
ADMISSIBILITY OF CO-DEFENDANT’S WRITTEN PROFFER
The district court admitted a written proffer of evidence
attached to Russo’s plea agreement. We review challenged
evidentiary rulings for abuse of discretion. United States v.
Buchanan, 70 F.3d 818, 832 (5th Cir. 1995), cert. denied, 116 S.
Ct. 1340 (1996).
During redirect examination of Russo, the government offered
its plea agreement with Russo into evidence, contending it was
admissible as a prior consistent statement. The defendants did not
object to the admission of the plea agreement, but did object to
the proffer, on the grounds that it was hearsay and inadmissable as
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a prior consistent statement because there had been no allegation
of recent fabrication. The government responded that under
801(d)(1)(B) it was proper to introduce prior statements that Russo
had adopted to rebut the implied charge of improper influence or
motive. The district court allowed the document into evidence and
permitted Russo to read portions of it to the jury.
Rule 801(d)(1)(B) provides:
A statement is not hearsay if -
(1) Prior statement by witness -- The declarant
testifies at the trial or hearing and is
subject to cross-examination concerning the
statement, and the statement is. . .
(B) consistent with the defendant’s testimony
and is offered to rebut an express or implied
charge against the declarant or recent
fabrication or improper motive.
FED. R. EVID. 801(d)(1)(B). In Tome v. United States, 513 U.S. 150,
115 S. Ct. 696, 130 L. Ed. 2d 574 (1995)2, the Supreme Court held:
[Rule 801(d)(1)(B)] permits the introduction of a
declarant’s consistent out-of-court statements to rebut
a charge of recent fabrication or improper motive only
when those statements were made before the recent
fabrication or improper influence or motive.
513 U.S. at 155, 115 S.Ct. at 705. Because the proffer was written
after the improper influence or motive arose, it was clearly not
admissible under Rule 801(d)(1)(B) as interpreted by Tome.
Admitting the proffer was thus error. United States v. Riddle, 103
F.3d 423, 432 (5th Cir. 1997).
2
Tome was decided on January 10, 1995. This case was tried in
August 1995.
5
The government concedes that the admission of the proffer
violates the holding of Tome, but argues that the error was
harmless.
ADMISSIBILITY OF DEFENDANTS’ DEPOSITION TESTIMONY
The district court admitted portions of deposition testimony
given by Frye and Verkin in a related bankruptcy proceeding as well
as Frye’s answers to interrogatories pursuant to Rule 801(d)(2)(E),
as statements of co-conspirators. The defendants objected, citing
Bruton v. United States, 391 U.S. 123, 88 S. Ct. 1620, 20 L. Ed. 2d
476 (1968) and arguing that the statements were not made in
furtherance of the conspiracy. The district court found that the
statements were made in the furtherance of the conspiracy,
overruled the objections and denied defendants’ requests for
severance and limiting instructions.
We review the admission of co-conspirator statements under
Rule 801(d)(2)(E) for abuse of discretion. United States v. Krout,
66 F.3d 1420 (5th Cir. 1995), cert. denied, 116 S. Ct. 963 (1996).
The district court’s findings of fact relating to the admission are
reviewed for clear error. United States v. Stephens, 964 F.2d 424,
434 (5th Cir. 1992).
A statement by a co-conspirator is not admissible if the
person making the statement does not testify at trial. United
States v. Restrepo, 994 F.2d 173, 186 (5th Cir. 1993). The
government must prove, and the trial court must find, by a
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preponderance of the evidence that the statements were made in the
furtherance of the conspiracy to be admissible under Rule
801(d)(2)(E). Bourjaily v. United States, 483 U.S. 171, 107 S. Ct.
2775, 97 L. Ed. 2d 144 (1987). A statement made after the
conclusion of the conspiracy is not admissible under Rule
801(d)(2)(E). See United States v. Esacove, 943 F.2d 3, 4 (5th
Cir. 1991).
The government took the position at trial that the answers to
interrogatories and deposition testimony were designed to conceal
the conspiracy and to prevent its discovery. In Grunewald v.
United States, 353 U.S. 391, 401-02, 77 S. Ct. 963, 1 L. Ed. 2d 931
(1957) the Supreme Court distinguished acts of concealment done in
furtherance of the main criminal objectives of the conspiracy from
acts of concealment done after these central objectives have been
attained for the sole purpose of covering up after the crime. 353
U.S. at 405. In this case, the main objective of the alleged
conspiracy -- obtaining the excess loan proceeds -- was attained in
March 1987, when the loan was funded. The statements in question
were made by the defendants years after the receipt of the
proceeds.
The prosecution included in the indictment as an additional
objective of the conspiracy “to prevent the detection of their
receipt of the money.” The government argued in the district court
that because of this allegation, the co-conspirator statements
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qualified as “made in furtherance of the conspiracy.” The
government’s brief on appeal does not mention this theory of
admissibility. Instead, they argue that the depositions and
interrogatories were properly admissible under Rule 801(d)(2)(D) as
“a statement of the party’s agent or servant concerning a matter
within the scope of the agency or employment, made during the
existence of the relationship, citing United States v. Saks, 964
F.2d 1514, 1523-26 (5th Cir. 1992).
We reject the district court’s implicit finding that the
statements were made “in furtherance” of the conspiracy as contrary
to the Supreme Court’s mandate in Grunewald. Further, the record
does not reflect the factual predicate necessary for 801(d)(2)(D)
admissibility. We therefore find that the district court erred in
admitting the defendants’ deposition testimony and answers to
interrogatories.
HARMLESSNESS
We must next determine whether these errors, either standing
alone or cumulatively, were so harmful that they mandate reversal.
The Russo proffer, authored by the prosecutor, is particularly
troublesome for two reasons. First, it was the government’s
version of the case, capsulized in written form, available to the
jury during deliberations. Second, the proffer was much more
favorable to the government’s theory of the case than the actual
testimony by Russo at trial because it contained statements about
8
the defendants’ state of mind, GECU “knowledge” and what GECU would
have done had it known the true facts, none of which was included
in Russo’s trial testimony.
The defendants’ statements, made years after the alleged
crime, as part of a bankruptcy proceeding are likewise harmful,
imputing to the defendants an intent to conceal their activities
surrounding the transactions in question.
The cumulative effect of these two errors, in light of the
fact that the remaining evidence in this case raised real
sufficiency concerns, requires reversal for new trial. See United
States v. Riddle, 103 F.3d 423, 434 (5th Cir. 1997).
SUFFICIENCY OF THE EVIDENCE
Hendricks, Frye and Verkin each challenge the sufficiency of
the evidence to sustain their convictions. Viewing the evidence
and the inferences that may be drawn from it in the light most
favorable to the verdict, this court must determine whether a
rational jury could have found the essential elements of the
offenses beyond a reasonable doubt. United States v. Aubin, 87
F.3d 141, 144 (5th Cir. 1996), cert. denied, 117 S. Ct. 965 (1997).
To establish a conspiracy under 18 U.S.C. § 371, the
government must prove (1) there was an agreement between two or
more persons to pursue an unlawful objective; (2) the defendant
voluntarily agreed to join the conspiracy; and (3) that one of the
persons committed an overt act in furtherance of the conspiracy.
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United States v. Pettigrew, 77 F.3d 1500, 1519 (5th Cir. 1996).
The agreement to join the conspiracy need not be express, but may
be inferred from circumstantial evidence. Id. To sustain a bank
fraud conviction under 18 U.S.C. § 1344, the government must prove
that the defendant knowingly executed or attempted to execute a
scheme or artifice (1) to defraud a financial institution; or (2)
to obtain any property owned by, or under the custody or control
of, a financial institution by means of false or fraudulent
pretenses, representations or promises. A “scheme to defraud”
includes the use of fraudulent pretenses or representations
intended to deceive to obtain something of value from a financial
institution. The defendant must make a material misrepresentation
to the bank, that is, one having “the natural tendency to influence
or was capable of influencing the decision of the lending
institution.” United States v. Campbell, 64 F.3d 967, 975 (5th
1995).3 It is clear and undisputed that neither borrowing excess
3
The Supreme Court recently held that materiality of the
falsehood is not an element of the crime of making a false
statement to a federally insured bank under 18 U.S.C. § 1014, after
concluding that the term “false statement” contained in that
statute incorporated no common law meaning requiring materiality.
United States v. Wells, ___U.S.___, 117 S. Ct. 921, 927-29, 137 L.
Ed. 2d 107 (1997). The statute at issue here proscribes “fraud.”
The term “fraud” has traditionally encompassed the requirement of
a material misrepresentation or omission in order to be actionable.
See BMW of North America v. Gore, ___U.S.___, 116 S. Ct. 1589,
1600-1601, 134 L. Ed. 2d 809 (1996). We therefore conclude that
Wells does not abrogate the Fifth Circuit rule, articulated in
Campbell, requiring the government to prove materiality in a bank
fraud case. See United States v. Cochran, 1997 WL 13790, *7 n.3
(10th Cir., March 25, 1997).
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money nor using a trustee (or “strawman,” as the government
referred to Beach) are crimes. Rather, the government contends
that the convictions are based on affirmative concealment intended
to defraud -- that is concealment of the fact that the defendants
received proceeds beyond what was necessary to purchase the assets.
The defendants contend that this is a legitimate but complex
business deal that GECU entered into because it benefitted
financially; the transaction bailed GECU out of a disastrous
preexisting loan on the beer distributorship. They contend that
GECU got exactly what it bargained for in terms of both collateral
and risk, and that distribution of the loan proceeds, as well as
Beach’s role, were revealed in the closing papers. Further, Verkin
contends that he was entitled to, but did not receive, a real
estate commission on the deal that was greater than the amount he
received as his share of the proceeds, making it unlikely that he
intentionally committed fraud to get less than he had earned on
commission.
The government relies primarily on the testimony of former
GECU employee Carol Cambern that she did not know that the loan
included excess proceeds and if she had known, she would not have
voted to approve the loan. The government argues that Cambern’s
testimony was “circumstantially corroborated” by the fact that the
credit union required a $300,000 certificate of deposit before
making the loan. They reason that requiring such security is
inconsistent with including excess loan proceeds in the deal.
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Defendants answer that neither GECU’s loan officer assigned to this
account, GECU’s president, nor its lawyers who drafted and reviewed
the loan documents testified. The jury heard no testimony
concerning what these individuals knew at the time the loan was
made. Further, they argue that the request for additional security
is totally consistent with the additional risk involved in loaning
excess proceeds.
There were two events referred to at trial as closings. The
first was a meeting on March 26, 1987 at the law offices of
Fulbright and Jaworski, who served as GECU’s attorneys. After
extended negotiations and redraftings, the parties concluded the
agreement for the purchase of the brewery. The next day, the
buyers and sellers attended a real estate closing at Texas American
Title Company where the title to the real estate was transferred.
No GECU employee, attorney or representative attended the second
closing, although they were clearly entitled to be present.
Nothing in the record explains their absence. From the first loan
commitment, GECU reserved the right to have their lawyers draft or
review every document necessary to close the deal. The details of
the transaction changed many times between the initial proposal and
final closing, which is typical for a complex, multi-party, multi-
million dollar business deal. It is clear that the documents
available at the real estate closing revealed all the relevant
information, including who held title to the land, how the loan
proceeds were being distributed, and Beach’s true role in the
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transaction.
The government introduced into evidence an early proposal from
the defendants to GECU that includes a $2.2 million dollar item
designated as the amount necessary to buy out prior partners. They
asked the jury to infer that “prior partners” refers to Beach, who
at that time was not a partner, and who, even when he became a
partner in the joint venture, did not hold a $2.2 million dollar
interest. However, at the time the document was drafted, the
defendants were in negotiations with persons associated with the
Campbell Estate whom they asked to join their joint venture. The
agreement with Beach was not reached until later. In sum, the
“prior partner” item was not a misrepresentation when drafted, and
the myriad changes between that early proposal and the final deal,
which eventually included Beach as a joint venturer, were revealed
in the subsequent paperwork and the closing documents. GECU’s
failure to review the documents or send a representative to the
closing does not make an otherwise legitimate, but complex,
business transaction a crime. However, the government asked the
jury to infer that the defendants structured the deal in this way
in an effort to conceal Beach’s true role in the transaction.
The record does reveal that defendants made one
misrepresentation during the negotiations, which the government
emphasized at trial. The original proposal included approximately
500 acres of real estate, appraised at $32 million. Later, 41
acres were carved out of that parcel and transferred to the
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defendants free and clear. There is evidence that the defendants
lied to GECU about the reason for this change -- claiming that the
41 acre change resulted from “survey problems” which did not exist.
A rational juror could certainly conclude that this was a
misrepresentation, but it was simply not material to GECU’s
decision to loan the money. The appraised value of the remaining
property was accurately revealed and well in excess of the amount
GECU determined was necessary to secure that portion of the loan.
These facts present a very close question. However, we are
unable to say that no reasonable juror could have found all of the
elements of the charged crimes beyond a reasonable doubt. In the
event that the government elects to retry the defendants, the jury,
after considering the admissible evidence without the taint of
error, must make that determination.
CONCLUSION
For the foregoing reasons, we reverse the defendants’
convictions and remand for further proceedings.
REVERSED AND REMANDED.
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