UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-10255
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
MICHAEL A. GROSSMAN,
Defendant-Appellant.
Appeal from the United States District Court
For the Northern District of Texas
July 8, 1997
Before DAVIS, STEWART and PARKER, Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
Appellant Michael A. Grossman was convicted after a jury trial
of one count of conspiracy to commit wire fraud and to make false
entries into the records of a savings and loan in violation of 18
U.S.C. § 371 and eleven counts of wire fraud in violation of 18
U.S.C. § 1343. Appellant was sentenced to three years in prison,
to be followed by five years of probation, and ordered to pay
restitution of $5 million. He appeals.
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I. FACTS
Michael Grossman was a Dallas, Texas real estate attorney and
investor who, in partnership with his father Martin Grossman,
purchased distressed properties, turned them around and sold or
managed them at a profit. They had extensive real estate holdings
and one of their companies, M&G Management Co., Inc. (“M&G”),
managed approximately twelve hotels in Texas, Louisiana and
Oklahoma. In January 1987, Michael Grossman’s net worth, according
to one estimate, was over $49 million.
Heritage Savings and Loan Association (“Heritage”) was a state
chartered savings and loan association located in Elk City,
Oklahoma, the deposits of which were insured by the Federal Savings
and Loan Insurance Corporation (“FSLIC”). Richard Armstrong was
the president of Heritage and owned approximately 11 percent of its
stock. Initially, most of Heritage’s loans were on single-family
residences. When the oil and gas market declined in western
Oklahoma, many of these home loans went into default and Heritage
began experiencing net worth problems.
In March 1984, Heritage made a $10 million loan on a project
in Edmond, Oklahoma known as “the Oaks.” The plan was to develop
and construct 92 luxury condominium town homes around a golf
course, clubhouse, swimming pool and tennis court. The loan went
into default after fourteen units were built and Heritage accepted
a deed-in-lieu of foreclosure in settlement of the borrower’s debt.
The Oaks, the largest piece of real estate owned (“REO”) by
Heritage, lost $569,000 in 1984 and over $8 million in 1985, and
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was a significant drain on the institution.
On December 31, 1985, H. George Schuler purchased all of the
outstanding stock of Heritage for $3.4 million. Schuler deposited
about $1.7 million into Heritage as a capital contribution and
another $1.7 million into an indemnification account for the
benefit of the selling shareholders. That account was pledged to
Heritage as a guaranty against certain carrying costs and specified
losses, including those associated with the Oaks project. Upon the
sale of the Oaks, any funds remaining in the account would be
distributed to the former shareholders.
The accounting for the sale of Heritage to Schuler utilized a
method called “push down accounting.” Ordinarily, when a bank
forecloses on property, it is put on the books at the lower of the
original loan balance or the appraised value at the time of
foreclosure. “Push down” accounting, however, enabled Heritage to
obtain a new appraisal on the Oaks for $5.7 million as of Schuler’s
acquisition date and adjust the value on the institution’s books
downward to reflect this value. As a result, if the Oaks sold for
more than $5.7 million, Heritage would be able to recognize a gain
on the sale and improve its capital position.
Heritage’s initial efforts to sell the Oaks were unsuccessful
and its financial condition continued to deteriorate through the
first five months of 1987. The Federal Home Loan Bank Board
(“FHLBB”) was closely monitoring the situation at the institution
and was considering imposing a supervisory agreement that would
restrict lending operations if the deficiency was not corrected.
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In March 1987, Michael Grossman was approached by Craig
Glendenning, who was associated with a real estate company called
Craig Properties. At that time, Michael Grossman believed the real
estate market had bottomed out and wanted to buy some properties
while the prices were low. Glendenning introduced Michael and
Martin Grossman to Armstrong and Schuler. At the initial meeting,
one of Craig Properties’ principals proposed that Heritage sell the
Oaks to the Grossmans and afterwards provide a $15 million basket
of loans to them. Michael Grossman made four trips to the site,
and determined that he could be successful with it. He was told
that Heritage had $10 million in the property and had an appraisal
at $8.5 million. After a series of negotiations, the Grossmans
agreed to make a $1.5 million down payment and purchase the Oaks
for about $8 million. In exchange, Heritage committed to fund a
$15 million basket of loans to the Grossmans and their related
entities, subject to normal underwriting requirements. Michael
Grossman told Glendenning that he wanted to borrow the funds for
the down payment, so Glendenning introduced him to Addison Terry,
a loan broker from Houston, Texas.
Terry arranged for the Grossmans to borrow the down payment
from Louisiana National Life Insurance Company. The Grossmans
personally guaranteed repayment within 60 days and agreed that when
Heritage funded additional refinancing loans for their properties,
a portion of the proceeds would be disbursed by the title company
to the Addison Terry Company and applied to the repayment of the
$1.5 million loan. Heritage’s records clearly revealed that the
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Grossmans were borrowing the money for the down payment from Terry
and that monies from the basket of loans would be used to repay
him. There was testimony that Heritage’s board and the FHLBB were
not “informed” that the down payment was borrowed, but Michael
Grossman had no contact with either the board or the regulators.
In addition to borrowing the $8.2 million to purchase the
Oaks, the Grossmans eventually made four other loans from
Heritage’s “basket of loans,” one before the Oaks closing, and
three after:
Valley Towers $850,000 on 6/26/87
The Oaks $8.2 million on 7/02/87
Oklahoma City $1.85 million on 7/27/87
M&G $1.35 million on 7/30/87
Duro $2.7 million on 9/04/87
Heritage also funded loans to two individuals, B. J. Hayes and
Jay Saldi, at the end of July 1987 to enable them to purchase town
homes in the Oaks. Glendenning provided the money for their down
payments and paid each one $5000 for participating in the
transactions. Neither Hayes or Saldi ever lived in the town homes.
Michael Grossman agreed to lease their town homes for use as model
homes and to provide full payment of their mortgages. Hays
defaulted on his loan in January 1988 when Michael Grossman stopped
making lease payments to him. Saldi also defaulted on his loan.
Finally, Martin Grossman purchased two town homes at the oaks
and received a loan in the amount of $524,500 from Heritage. His
down payment was funded with $59,000 from the proceeds of the
Oklahoma City loan. There were no other units sold at the Oaks.
By the fall of 1987, there were disputes between the Grossmans
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and Heritage concerning continued funding of the basket of loans.
In late October, Grossman’s loans became delinquent and Heritage
refused to fund any more loans. The parties discussed rescinding
the transactions but never received the requisite approval from the
FHLBB. None of the loans -- the Oaks, the basket of loans or the
townhouse loans -- were repaid.
In January 1995, bankers Schuler and Armstrong, real estate
agent Glendenning and purchasers Michael and Martin Grossman were
indicted on twelve counts of conspiracy and wire fraud in
connection with these transactions. Schuler and Glendenning
pleaded guilty and received probation. Armstrong and Michael
Grossman were convicted on all counts. Martin Grossman was
acquitted on all counts. Michael Grossman and Armstrong appealed,
but Armstrong, after pleading guilty in an unrelated case, withdrew
his appeal.
II. SUFFICIENCY OF THE EVIDENCE
Michael Grossman contends that the evidence at trial was
insufficient to sustain his convictions on any count. He timely
filed a motion for judgment of acquittal at both the close of the
government’s case and at the conclusion of all of the evidence.
The standard of review, therefore, requires this court to view the
evidence in the light most favorable to the jury verdict and affirm
if a rational trier of fact could find that the government proved
all essential elements beyond a reasonable doubt. United States v.
MacKay, 33 F.3d 489 (5th Cir. 1994). If “the evidence viewed in
the light most favorable to the prosecution gives equal or near
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equal circumstantial support to a theory of guilt and a theory of
innocence, the conviction should be reversed.” Id., 33 F.3d at
493. This court has recognized the high degree of deference
accorded the jury verdict in a criminal case, terming this standard
of review “imposing.” United States v. Parekh, 926 F.2d 402, 405
(5th Cir. 1991). There are few disputes about the events that
serve as the basis of Michael Grossman’s convictions. Rather, the
government and appellant differ concerning what conclusions can
rationally be drawn from those facts concerning the parties’
knowledge and intentions.
Count 1 of the indictment charged the offense of conspiracy
under 18 U.S.C. § 371. To establish a conspiracy under § 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.
United States v. Pettigrew, 77 F.3d 1500, 1519 (5th Cir. 1996).
The objects of the conspiracy set out in the indictment were to
commit the offenses of wire fraud under 18 U.S.C. § 1343, aiding
and abetting that offense under 18 U.S.C. § 2 and making false
entries into the books and record of the savings institution in
violation of 18 U.S.C. § 1006. Counts 2 through 12 of the
indictment charged separate offenses of wire fraud. Specifically,
they charged that the five codefendants devised a scheme and
artifice to defraud and to obtain money and property from Heritage
by means of false and fraudulent pretenses, representations and
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promises by making eleven wire transfers from June 26, 1987 through
September 11, 1987 from Heritage to fund the Oaks loan and the
accompanying basket of loans to the Grossmans.
The conspiracy and wire fraud are based on the same alleged
conduct. As set out in the indictment, that conduct consisted of:
[] defendants H. George Schuler and Richard F.
Armstrong agreed to sell the Oaks to Michael A. Grossman
and Martin B. Grossman for $8,462,172 with a cash down
payment of $1,500,000 and to provide additional loans
[of] $15,000,000 from which the $1,500,000 would be
repaid.
[] defendants H. George Schuler and Richard F.
Armstrong would artificially enhance the financial
appearance of Heritage by funding the Oaks loan to
defendant Michael A. Grossman.
[] defendants Michael A. Grossman and Martin B.
Grossman would submit false and fraudulent documents to
defendants H. George Schuler, Richard F. Armstrong and
Heritage in connection with the loans to Valley Towers,
Oklahoma City Hotel Joint Venture, M & G Management, and
Duro Resources, Inc.
[] defendants H. George Schuler and Richard F.
Armstrong would cause Heritage to fund the loans to
defendants Michael A. Grossman and Martin B. Grossman
with portions of the loan proceeds applied to the
borrowed down payment and other portions of the proceeds
diverted to the personal use of defendants Michael A.
Grossman, Martin B. Grossman and Thomas Craig
Glendenning.
[] defendant Thomas Craig Glendenning [] solicit[ed]
two nominees to purchase two townhouses located in the
Oaks development from Heritage, for which he would
provide the down payment.
The only conduct alleged against Michael Grossman that is
inherently illegal is the submission of false or fraudulent
documents to Schuler, Armstrong and Heritage. Michael Grossman’s
other alleged activities, while legal, were criminal to the extent
that he fraudulently concealed them from Heritage.
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The district court’s charge correctly advised the jury that
the offenses must have been committed knowingly and with the
specific intent to defraud. The charge stated that, to “establish
specific intent, the government must prove that [Michael Grossman]
knowingly did an act which the law forbids or knowingly failed to
do an act which the law requires, purposely intending to violate
the law.” Michael Grossman contends that there was insufficient
evidence of the required mental elements of the crimes alleged to
sustain his convictions.
We must then examine the acts that the government relied on to
establish Michael Grossman’s guilt. First, the government
contended that Michael Grossman falsely represented to Heritage
that the loans would be used by the named borrowers for their
business and commercial purposes, then applied the funds to
personal use. Each of the loans contained the following language:
Borrower represents and warrants lender that the
loan will be used by borrower for its business and
commercial purposes and not for personal, family,
household or agricultural use.
This clause is the focus of the “false and fraudulent
documents” allegation in the indictment. The government contended
at trial that Michael Grossman violated this clause by (1) making
a $20,000 payment for his children’s tuition out of a bank account
where a portion of the loan proceeds had been deposited and (2)
using the loan proceeds for business purposes unrelated to the
business purposes of the specific entity who is named as the
borrower on the particular loan in question.
As to the tuition payment, the evidence showed an account
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balance of $9,308 in non-Heritage funds on June 30, 1987 when
Michael Grossman wrote the $20,000 check to his household account
for the tuition. A $89,040 deposit of Heritage funds was made on
June 30 and posted to the account on July 1, 1987. On July 2,
1987, another deposit of $17,175 in non-Heritage funds was made to
the same account. This evidence in not sufficient to sustain a
conviction based on Michael Grossman’s use of Heritage loan funds
for personal expenses.
The second allegation requires us to determine if the evidence
supports the conclusion that the Grossmans fraudulently used loan
proceeds for business expenses related to projects other than the
business entity named on the loan. On each of the loans in
question, the borrowers were entities primarily owned and
controlled by Martin and Michael Grossman. Testimony from both
government and defense witnesses confirm that the parties’
understanding was that the purpose of the loans was to refinance
existing debt and to pull equity out of certain properties that
could then be used to acquire additional properties, especially the
Oaks. The Grossman’s reading of the clause -- that it allowed use
of the loan proceeds for business purposes related to any of their
holdings -- while not the only possible interpretation of the
language, was reasonable. Because everyone involved accepted this
interpretation and openly acted in accordance with this
understanding the alleged breach of this clause does not support a
finding of fraudulent intent on the part of Michael Grossman.
Next, the government took the position that the borrowed down
10
payment is proof of fraudulent intent. It is clear that borrowing
the down payment was not precluded by law nor by the agreement of
the parties and that Michael Grossman fully disclosed his plan to
borrow the down payment and to repay that loan with proceeds of
various basket-loans that withdrew equity invested in other real
estate projects. The borrowed down payment does not support the
conclusion that Michael Grossman had the intent to defraud
Heritage.
Next, the government alleges fraud based on language in the
loan papers that provides that the loans are “separate and
independent from any other transaction between Lender and Borrower.
. . [n]either the Commitment to make the Loan nor the closing of
the Loan is conditioned in any respect upon Borrower purchasing
property or obtaining other credit or services from Lender. . . .”
The government contends that these statements were false and
fraudulent because each of the loans was conditioned upon the
Grossmans’ purchase of the Oaks from Heritage, and proceeds from
the loans were used to repay the borrowed down payment on the Oaks.
The evidence showed that the “separate and independent”
language is standard or “boilerplate” language in loan documents.
Michael Grossman testified that he understood the language to mean
that the loans were not cross-collateralized and not in violation
of the Tying Act.1 In fact, he changed the “separate and
1
The Bank Tying Act is a federal statute that permits bank
customers to seek civil damages when one transaction is conditioned
on the customer’s willingness to complete a second transaction with
the same institution. United States v. Beuttenmuller, 29 F.3d 973,
977 n.8 (5th Cir. 1994). “Separate and independent” language is
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independent” language in the Oaks loan, because he understood that
his purchase of the Oaks was based on Heritage’s commitment to loan
him the additional funds. Further, the loan papers, signed by
Michael Grossman, filed with Heritage and available to the
regulators make the relationship between the various transactions
very clear. The evidence does not support the conclusion that
Michael Grossman harbored intent to defraud or in any way mislead
the bank or the regulators concerning the relationship between the
loans.
Next, we must examine the allegation that Michael Grossman
participated with Schuler and Armstrong in a scheme to artificially
enhance the financial appearance of Heritage, by agreeing to a
purchase price above the appraised value and by dating the closing
documents on June 30 when the loan was not funded until two days
later. The evidence uniformly portrayed the pre-purchase
negotiations as to purchase price of the Oaks as legitimate, arms-
length and hard fought. There is no evidence that Michael Grossman
had any information that would indicate that the purchase price was
fraudulently or artificially high. He testified that he believed
that the Oaks, by themselves, may have had less than $10 million in
value. However, he concluded that the commitment by Heritage to
fund mortgage loans for Oaks town home purchasers in a tight
market, the inclusion of marketing funds, as well as the advantages
afforded the Grossmans by the basket of loans made the total
included in loan documentation to protect the bank from potential
civil liability.
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negotiated price a fair one.
There are two government theories as to why the jury could
conclude that false entries were made on Heritage’s records.
First, Heritage initially booked a profit on the Oaks loan that the
regulators later determined was inappropriate because the down
payment had been borrowed. The evidence does not show that Michael
Grossman had either knowledge about or authority to influence
Heritage’s decision to book a profit. Second, the closing papers
were dated on June 30, 1987 and the government contends that the
deal did not “really” close until two days later. The fact that
the parties chose to close on June 30 in order to show the
transaction on the books during the second quarter of 1987 is not
evidence of illegality or fraud. Also, Michael Grossman signed the
closing papers on June 30, they were dated June 30, and he left a
check for $300,000 as a partial payment on that day. The evidence
is not sufficient for a rational juror to conclude that Michael
Grossman’s actions concerning the closing date amounted to fraud.
Finally, there was evidence that Saldi and Hays were nominee
borrowers and that Michael Grossman knew of and participated in the
structuring of the nominee loans. Such loan structure is not
illegal. Again, because there is no evidence that Michael Grossman
concealed the transactions or defrauded Heritage with regard to the
Saldi and Hays transactions, the fact that nominees were used does
not support his convictions.
Michael Grossman emphasizes that the regulators, lawyers,
accountants and bank employees “knew exactly what was going on” and
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that he dealt honestly and openly with all of these individuals
throughout the entire process. The government responds that the
victim of bank fraud is the financial institution, not its
officers, citing United States v. Aubin, 87 F.3d 141, 146 (5th Cir.
1996), cert. denied, 117 S.Ct. 965 (1997). Thus, even if there was
full disclosure to Heritage personnel, the savings and loan was
nevertheless defrauded and Michael Grossman may be criminally
liable. Id. In fact, Aubin is not only distinguishable, but
highlights the inadequacies of the evidence in this case. Unlike
the evidence adduced in Grossman’s trial, Aubin “deliberately
structured the transaction so that the loan documents would not
reveal that [the purchasers] were involved in the deal.” Id. 87
F.3d at 146. Further Aubin’s co-defendant/bank officer “knew that
he could not tell the members of the loan committee the truth about
the transaction because they would not want to do anything that
might incur regulatory scrutiny.” Id. In contrast, the Oaks,
already subject to intense regulatory scrutiny, was faced with
certain closing unless it sold the Oaks very quickly. The
officers, in an effort to save the institution, negotiated what
everyone anticipated was a mutually beneficial deal, with
acknowledged risks. Unfortunately, both Heritage and the Grossmans
sustained catastrophic losses. Michael Grossman, whom the
government repeatedly characterized to the jury as having more
money than Heritage, risked and lost his entire fortune. But the
government did not offer sufficient evidence of fraud or conspiracy
by Michael Grossman against Heritage to sustain the convictions.
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As this court has held, “[t]here is nothing unusual about people,
who can economically benefit each other, getting together and
constructing a mutually beneficial bargain.” United States v.
Beuttenmuller, 29 F.3d 973, 983 (5th Cir. 1994). Moreover, “no
criminality can be attached to [real estate purchasers or lending
institutions] because the bottom dropped out of the real estate
markets. The decline of any market is part and parcel of the risks
of investing.” Id.
In sum, the government contended that Michael Grossman either
committed an inherently illegal act, or lied and deceived Heritage
about some otherwise legal behavior, thereby inducing Heritage to
assume a risk it could have otherwise avoided. The government did
not prove that Michael Grossman submitted false and fraudulent
documents to Schuler, Armstrong and Heritage in connection with the
subject loans. Further, given Michael Grossman’s lack of
concealment, the evidence in insufficient to support the mens rea
element of conspiracy or wire fraud. See United States v. Pipkin,
1997 WL 291685 (5th Cir. 1997). We therefore reverse Michael
Grossman’s convictions.
REVERSED.
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