United States v. Wester

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 95-1143

UNITED STATES OF AMERICA,

Appellee,

v.

C. WILLIAM WESTER,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Selya, Cyr and Boudin,

Circuit Judges.

Rhea P. Grossman, P.A. for appellant.

Ellen R. Meltzer, Special Counsel, Fraud Section, Criminal

Division, Department of Justice, with whom Donald K. Stern, United

States Attorney, and Pamela Merchant, New England Bank Fraud Task

Force, were on brief for the United States.

July 22, 1996

BOUDIN, Circuit Judge. Clary William Wester was

formerly president, chairman of the board, and chief

executive officer of First Service Bank for Savings ("First

Service"), a federally insured bank in Leominster,

Massachusetts. In the late 1980s, Wester arranged various

transactions at First Service, including a series of loans by

First Service to Webster's partners in a separate real estate

venture, made with the understanding that the partners would

use the loaned funds to buy out Wester's interest in the

partnership. At trial, Wester was convicted by a jury of

several different crimes. He now challenges the jury

instructions and two adjustments to his sentence.

Although Wester does not directly dispute the

sufficiency of the evidence, one of his claims as to jury

instructions can be taken to raise the issue of sufficiency

indirectly. For that reason, we begin by describing what the

evidence would have permitted the jury to find. A reviewing

court's perspective on the evidence depends on the claim of

error being considered, and for a sufficiency claim, we take

the evidence most favorable to the verdict. E.g., United

States v. Dodd, 43 F.3d 759, 760-61 (1st Cir. 1995).

In June 1986, Wester formed a partnership with three

other men to construct a condominium project in Manchester,

New Hampshire. The three others were Robert Fredo, senior

vice president at First Service, Robert George, a developer,

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and Charles Morgan, a broker. Wester and Fredo supplied

start-up money, and Wester helped arrange a $12.4 million

loan organized by New England Financial Resources, Inc.

("NEFR"), a commercial real estate lender not affiliated with

First Service. The loan was secured by land and future

improvements and a personal guaranty of the debt from each of

the partners.

Since Morgan had been a frequent borrower at First

Service, NEFR was concerned that Wester's and Fredo's

participation in the partnership might create conflicts of

interest. As a condition of the loan NEFR required a

certificate from First Service acknowledging that Wester and

Fredo had disclosed their interest in the project to the

board of directors of First Service. The certificate issued

by First Service stated, inter alia, that the bank "was not

involved in the financing of this project and would not,

without specific prior approval, grant any additional loans

to Messrs. Morgan or George."

In the fall of 1986, Morgan and George proposed another

condominium project, this one in Massachusetts. Wester

suggested that First Service participate in the project as a

joint venturer, but said that he and Fredo would need to

divest their interests in the earlier partnership. The four

men agreed that Wester and Fredo would sell their interests

to George and Morgan for $425,000 each, and be reimbursed for

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additional start-up money they had provided, all to be paid

from future profits from the New Hampshire project. Before

the details of the buyout plan had been resolved, First

Service (through a subsidiary) joined the new project with

Morgan and George, and the bank provided a $5 million loan to

the venture.

By June 1987, the New Hampshire project had yet to begin

earning profits. Wester grew impatient and told George and

Morgan that he wanted his buyout payments. When George said

this was not feasible because of cash flow problems, Wester

offered to provide First Service loans to George and Morgan

to fund the buyout payments. These loans, and the resulting

buyout payments, became the basis for most of the later

charges against Wester.

On June 12, 1987, George signed two promissory notes for

unsecured loans by First Service totalling $200,000. That

same day, George paid Wester and Fredo $100,000 each. Morgan

received a $300,000 loan from First Service on June 12;

several days later he paid Wester and Fredo $25,000 each, and

George and Morgan (through the partnership) gave Wester and

Fredo $250,000 for the start-up money previously contributed.

Neither Wester nor Fredo disclosed the true purpose of

these loans to First Service's loan review committee,

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executive committee, or board of directors.1 Nor did the

supporting documentation reveal that the loaned funds were

being used to fund the buyout. In one instance, the loan

set-up sheets stated that the purpose of the loan was to

"finance acquisition of real property"; in other instances no

purpose for the loan was provided. The jury could have found

that the failure to disclose the purpose of the loans to the

loan review committee was material, deliberate, and

dishonest.

This process was repeated several times over in the

following months, with Wester and Fredo arranging loans or

letters of credit to Morgan, George or entities they

controlled--and in one instance George's father--with

portions of the proceeds returned to Wester and Fredo to

satisfy the buyout. The last such loan was made on March 9,

1988. On March 10, 1988, the buyout agreement was executed,

and Wester's and Fredo's interests in the partnership were

terminated "retroactive" to January 1, 1987.

There was one more wrinkle of considerable importance.

The buyout agreement included a provision for releasing

Wester and Fredo from their personal guaranties on the

1Under the bank's rules, all insider loans and all loans
of over $5 million had to be approved by the board. The
executive committee had to approve loans between $1 million
and $5 million; and the loan review committee, on which
Wester and Fredo sat with other officers, could approve loans
up to $1 million.

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earlier $12.4 million loan from NEFR. NEFR, however, was

concerned about the financial health of the New Hampshire

condominium project. It made clear that it would only

consent to the release if the partnership obtained a $2.3

million bank loan or line of credit to provide additional

security for the $12.4 million loan.

Ultimately, Wester and Fredo arranged a $2.3 million

loan by First Service for the partnership, without any

disclosure to other bank officials of the connection to the

proposed release and without approval by First Service's

executive committee or board of directors. Under the bank's

rules, approval by the former was evidently required because

of the size of the loan. This loan and the promised release

were each specified as offenses in the subsequent indictment.

After a portion of the $2.3 million was disbursed to the

partnership, and before NEFR formally executed Wester's and

Fredo's releases from the guaranties, the FDIC began

investigating the goings-on at First Service. Wester and

Fredo were subsequently fired. First Service honored its

commitment to the partnership and released the balance of the

$2.3 million loan proceeds. NEFR never executed the

releases, but neither did it call upon Wester or Fredo to pay

based on their guaranties.

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On August 11, 1990, Wester and Fredo were named in a 22-

count federal indictment charging them primarily with

conspiracy, 18 U.S.C. 371, misapplication of bank funds, 18

U.S.C. 656, and bank bribery, i.e., the soliciting or

receiving of bribes or rewards for the making of the loans,

18 U.S.C. 215. The loans for the buyout payments and for

the release were charged as misapplications under section

656; the payments and promised release were charged as bribes

or rewards under section 215.

Fredo pled guilty before trial to one count each of

conspiracy, misapplication, and bank bribery, and testified

for the government at Wester's trial. After a 13-day jury

trial in July 1994, Wester was convicted of one count of

conspiracy, five counts of misapplication, and six counts of

bank bribery. He was acquitted of one count each of

misapplication and bank bribery, and two tax evasion counts.

In December 1994, Wester was sentenced to 46 months in

prison. This appeal followed. For the reasons that follow,

we affirm the convictions but remand for resentencing.

1. Wester's main challenge to the trial proceedings

concerns the district court's jury instructions on the

misapplication counts. In relevant part, 18 U.S.C. 656

provides criminal penalties for "an officer, director, agent,

or employee of . . . national bank or insured bank . . .

[who] willfully misapplies any of the moneys, funds or

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credits of such bank." Formally, the dispute on appeal

centers around the phrase "willfully misapplies"; in reality,

Wester's argument also presents the question whether the

evidence was adequate.

The problem that has confronted and perplexed the courts

is that there is no statutory definition or common law

heritage that gives content to the phrase "willfully

misapplies." United States v. Gens, 493 F.2d 216, 221 (1st

Cir. 1974). And to focus simply on the deprivation of

property is hardly much help since it is a purpose of banks

to lend money. In response, the case law has developed two

notions that help to clarify and delimit the statute--one

relating primarily to conduct and the other to intent.

First, "misapplication" has been taken by most courts to

mean "wrongful" use of the bank's moneys. See 1 Sand, et

al., Modern Federal Jury Instructions 24.01 (1995). And,

second, the courts have uniformly read back into the statute

an earlier requirement, removed by a careless revisor, that

the defendant have intended "to injure or defraud" the bank.

E.g., United States v. Angelos, 763 F.2d 859, 861 (7th Cir.

1985). Of course, the same facts can easily be the basis for

deeming the conduct to be wrongful and the intent fraudulent;

but both misapplication and scienter are required.

In this case, the district court's affirmative charge

describing the offense of misapplication was for the most

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part conventional. What Wester objects to on appeal is the

court's refusal to give certain additional language

specifically requested by Wester. The language--which Wester

believes to have been required by our decision in Gens--

appears at two different points in Wester's requested

instruction no. 37:

I instruct you that a loan to a
financially capable person who fully
understands that it is his responsibility
to repay the loan does not constitute
misapplication, even if the bank officer
involved with the loan receives proceeds
of the loan, or some other benefit.
Thus, in this case, with respect to the
loans charged, if the debtors were
financially capable of repaying the loans
and that [sic] they understood that it
was their responsibility to repay the
loans, Mr. Wester must be acquitted on
those counts irrespective of whether or
not he received proceeds, or any other
benefit, from those loans. . . .

. . .

Therefore, in this case, for each loan
alleged in the Indictment as a
misapplication of bank funds, if the
named debtor was financially capable of
repaying the loan and recognized his
responsibility to repay the loan, there
is no misapplication as a matter of law,
even if proceeds of those loans or some
other benefits were received by Mr.
Wester.

Needless to say, such language would have been very

useful to Wester. The government, it appears, did not try to

show that any of the designated borrowers in the

misapplication counts (E.g., George and Morgan) were

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fictitious or financially irresponsible or had never assumed

liability for the loan. Wester suggests that for bona fide

loans to financially responsible borrowers, there is no

serious risk of harm to the bank and therefore, even apart

from the authority of Gens, no reason to apply the statute.

Wester's position is far from absurd, cf. United States

v. Dochtery, 468 F.2d 989 (2d Cir. 1972), but in the end it

reads the statute too narrowly. There is no indication that

insider loans are inflexibly forbidden by federal law, but

they obviously create a special set of dangers. At least one

danger--quis custodiet ipsos custodes--is that the insider

who approves or fosters the loan may do so too readily if he

himself benefits by it. Controls on such loans, including

authorizations and disclosures, are therefore pertinent to

the safety of the bank.

Further, financial responsibility on the part of the

borrower is not an absolute but a matter of degree. To say

that the nominal borrower is at the outset financially

capable of repayment hardly proves that the bank would have

made the loan if it had been fully apprised of the risks and

circumstances. Here, two members of First Service's

executive committee testified that they would not have

approved the loans if Wester had disclosed that the proceeds

were going to fund the buyout of Wester and Fredo's

interests.

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In this instance, the jury could reasonably have found

that Wester caused the loans to be made for his own benefit

without obtaining approvals from the executive committee or

board of directors required under the bank's own rules (as to

the largest $2.3 million loan) and (as to it and all others)

because he deliberately suppressed or withheld information

that the purpose of the loans was one that the bank would not

have approved.2 This wrongful conduct permitted the jury in

turn to find that Wester had engaged in the "misapplication"

of bank funds. All that remained was to find scienter.

The scienter requirement--an intent to injure or

defraud--is stated in the alternative. In the Supreme

Court's classic summary, "the words `to defraud' commonly

refer `to wronging one in his property rights by dishonest

means or schemes,' and `usually signify the deprivation of

something of value by trick, deceit, chicane or

overreaching.'" McNally v. United States, 483 U.S. 350, 358

(1987) (citation omitted). Whether or not Wester intended to

injure the bank, a jury could properly find that he intended

to "defraud" the bank by causing it through consciously

dishonest means to part with its property for his own

benefit.

2The government's brief conveys the impression that, as
to all of the loans there was a failure to obtain required

approvals by a bank board or committee. On our reading of
the transcript pages cited by the government, this is clear
only as to the $2.3 million loan.

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This brings us to Gens. In that case, the defendant

Gens, a director of the bank, had persuaded others (e.g., one

of his friends) to borrow from the bank and to transfer the

funds to him; and bank officers working with Gens had

approved the loans knowing that he would obtain use of the

funds. As this court read the trial court's charge, it told

the jury that misapplication had occurred "if it was found

that [the officers] granted loans to the [nominal borrowers]

knowing that the proceeds would be turned over to Gens." 493

F.2d at 221. The jury convicted Gens and he appealed.

On appeal in Gens, this court rejected the government's

broad notion that "willful misapplication occurs whenever

bank officials grant loans to parties with the knowledge that

the proceeds will go to a third party." 492 F.2d at 223

(emphasis added). Our opinion pointed out that most of the

pertinent cases under the misapplication statute involved

loans to borrowers who were fictitious, unwitting,

irresponsible or had not assumed liability. The contrary was

so in Gens, except arguably as to one borrower; and the count

as to that borrower was remanded for a new trial under new

instructions.

Gens held that the government's "whenever" theory was

overbroad but Gens did not bar a misapplication charge in

every case where the straw happened to be a financially

responsible borrower. We so noted in United States v.

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Brennan, 994 F.2d 918 (1st Cir. 1993). There we said that a

misapplication charge could be made out where a bank officer

made loans to named debtors knowing that the proceeds would

go to a third party and where the surrounding circumstances

involved dishonesty (e.g., false entries in the bank's

records). Id. at 923-24.

Wester's requested instruction 37 was thus not warranted

by Gens because it would have converted a circumstance in

Gens--financial responsibility of the borrower--into an

automatic defense requiring acquittal regardless of other

evidence of dishonesty. Misapplication and intent to defraud

turn largely on the facts; the facts here were enough to

convict; and the requested instruction was overbroad and was

properly denied.

2. Wester's other complaint about the jury charge

concerns the district court's instruction based on Pinkerton

v. United States, 328 U.S. 640 (1946), that a conspirator may

be accountable for actions of co-conspirators taken in

furtherance of the conspiracy. Wester was charged with a

conspiracy that had as its objects misapplication and bank

bribery. Wester claims that the district court's Pinkerton

instruction was mistaken in two respects.

First, Wester argues that the Pinkerton instruction

allowed the jury to find him vicariously liable for the

substantive crimes of a co-conspirator even if those crimes

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were not the object of the conspiracy or in furtherance of

it. For example, he says that the jury could have found that

Wester was guilty of the substantive crime of bank bribery

because one of his co-conspirators committed that offense;

yet the jury could have found that the conspiracy's object

was limited to misapplication.

One wonders if Wester carefully read the transcript of

the jury charge before making this argument. After correctly

describing the other elements of the Pinkerton doctrine, the

district court stated that the jury must find "that the

substantive crime (attributed to the defendant vicariously)

was committed pursuant to the common plan and understanding

you found to exist among the conspirators," and that "the

defendant could have reasonably foreseen that the substantive

crime might be committed by his co-conspirator." In short,

the instruction itself answers Wester's hypothetical.

Second, Wester argues that it was inappropriate to give

a Pinkerton instruction at all, because "where there is

evidence of various substantive offenses . . . it raises the

risk that the jury will resort to the inverse of Pinkerton

and infer the existence of the conspiracy from the series of

substantive criminal offenses." He says this risk was

especially high here because the government concentrated its

efforts on proving only the substantive charges. We agree

neither with the premise nor the conclusion.

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In a case like this one, some interplay between the

jury's assessment of guilt on the substantive counts and the

conspiracy charge is both natural and appropriate. Indeed,

the fact that substantive crimes were carried out by the

defendants, following discussions between them, may well make

the fact of agreement more likely. Rossetti v. Curran, 80

F.3d 1, 5 (1st Cir. 1996). This is so whether or not a

Pinkerton charge is given; the charge is at most an added

complication for the jury but one well within its ken.

Here, the government offered ample evidence of

discussions between the four partners that provided a firm

basis for the conspiracy charge. There were pages of

testimony concerning the meetings among Wester, Fredo, George

and Morgan, that led to the various loans and the payments

back to Wester. This testimony provided grounds for the jury

to find that Wester participated in the charged conspiracy.

And, because Wester argued that he was unaware of many acts

undertaken by his co-conspirators (i.e, the false entries on

loan documents by Fredo), a Pinkerton instruction was

especially apt.

3. Wester's challenges to his sentence have more

merit. One argument is that the district court improperly

calculated the victim loss figures for one of the bank

bribery counts. The other concerns an adjustment for role in

the offense. We address the claims in that order, describing

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at the outset the calculation of the sentence. Citations are

to the 1987 edition of the guidelines which was applied in

this case.

At sentencing, the misapplication and bank bribery

counts were grouped as closely related counts under U.S.S.G.

3D1.2(d); and the bribery guideline was used to determine

the base offense level because its level is the higher of the

two. Id. 3D1.3(b). The base offense level for bank

bribery is eight, id. 2B4.1, to be increased based on the

greater of the value of the bribe or the improper benefit

conferred in return, according to the table at section 2F1.1

(fraud). In this case, the figure employed was the value of

the bribe.

At the sentencing hearing, the district court found that

Wester received, or intended to receive, bribes totalling

$12,650,000. From the presentence report, it appears that

this total reflected Wester's release from personal liability

on the $12.4 million NEFR loan (in exchange for arranging the

$2.3 million loan to Morgan and George), and the $250,000 in

buyout payments he received from Morgan and George. This

$12,650,000 figure subjected Wester to the maximum 11-level

increase. U.S.S.G. 2F1.1.

The resulting offense level of 19 (8 plus 11) was

further adjusted upward by 4 levels to 23, reflecting

Wester's role as an organizer or leader (a separate issue

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addressed below). There was no reduction for acceptance of

responsibility. The resulting range, for a first time

offender, is 46 to 57 months' imprisonment. The district

court sentenced Wester, at the bottom of the range, to 46

months.

On appeal, Wester first maintains that the district

court should not have included the $12.4 million figure as

any part of the value of the bribes. He contends that the

release from his personal guaranty on the $12.4 million loan

should not count because NEFR did not consider the $2.3

million loan a quid pro quo for the release, an argument that

he supports by pointing out that NEFR never formally executed

the release. He also asserts that First Service would likely

have made the $2.3 million loan to Morgan and George

regardless whether NEFR offered to release Wester and Fredo

from personal liability.

18 U.S.C. 215 makes it criminal corruptly to solicit,

accept or agree to accept anything of value intending to be

influenced or rewarded in connection with a bank transaction.

The jury was entitled to find that Wester did foster the $2.3

million loan to NEFR on the understanding that he would be

relieved of his personal guaranty. Whether the bank would

have made the loan anyway, and whether Wester actually

received the promised benefit, are of no moment under the

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statute; and the guidelines apply to a promised payment quite

as much as to payment actually received.3

Wester is on more solid ground when he argues that,

assuming that the promised release of his personal guaranty

could be counted for sentencing purposes, the district court

incorrectly valued the release at the $12.4 million figure,

which represented the full amount of the loan. It is far

from clear that this issue was properly preserved, a point to

which we will return; but the issue was discussed in oral

argument in this court, and the government has furnished us

with the Eighth Circuit's helpful decision in United States

v. Fitzhugh, 78 F.3d 1326, 1331 (8th Cir. 1996).

In Fitzhugh, the court was concerned with valuing the

improper benefit conferred on the borrower by a loan obtained

by bank bribery. The trial court had taken this value to be

simply the face amount of the loan; but as the Eighth Circuit

explained, citing authority and examples, "[t]he value of a

transaction is often quite different than the face amount of

that transaction." 78 F.3d at 1331. Indeed, the current

guideline commentary makes clear that (depending on the

facts) the value of a loan might be no more than the value of

a lower interest rate procured through the bribe. Id.

3The statute by its own terms applies to solicitations
and agreements to accept as well as to bribes actually paid.
As to the guidelines, see, e.g., United States v. Gillis, 951

F.2d 580, 585 (4th Cir. 1991), cert. denied, 112 S. Ct. 3030

(1992); U.S.S.G. 2C1.1 (lack of completion irrelevant).

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Obviously, if Wester had been bribed with a one-dollar

lottery ticket for a million dollar prize, no one would claim

that the ticket should be valued at the full potential

winnings. So, too, if he had been given a million-dollar

term life insurance policy. Here, the actual value of

Wester's promised release from his personal guaranty for the

$12.4 million loan depends on such factors as the likelihood

of default and the worth of the collateral securing the loan.

It is unlikely that the economic value of the release comes

close to $12.4 million.

At sentencing, neither the parties nor the probation

officer made any attempt to develop the information necessary

to estimate reasonably the value of the release. It appears

that in the district court Wester's primary concern was to

exclude any consideration of the release (on grounds we have

already rejected); and neither the probation officer nor the

government seems to have noticed the underlying problem with

using face value when the presentence report was prepared.

Thus, the district court was not fairly alerted to the issue.

Nevertheless, we think that the miscalculation should be

noticed as plain error. United States v. Olano, 507 U.S. 725

(1993). Prejudice exists since it is almost certain that the

misevaluation affected the guideline range, quite possibly to

a significant extent; for example, eliminating the $12.4

million figure entirely would lower the range to 30 to 37

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months. And while an appeals court is not required to notice

every such unpreserved error in sentencing, Olano, 507 U.S.

at 736, we think that this is a proper case for us to notice

a significant mistake. United States v. Whiting, 28 F.3d

1296, 1312 (1st Cir.), cert. denied, 115 S. Ct. 378 (1994).

Wester's other main claim as to his sentence is that the

district court erred in adjusting his offense level up four

levels for his role in the offense, under U.S.S.G 3B1.1(a).

This provision provides for a four-level enhancement if the

court finds that "the defendant was an organizer or leader of

a criminal activity which included five or more participants

or was otherwise extensive." On appeal, Wester's only

developed challenge is to the latter requirement that the

activity include five or more participants or be "otherwise

extensive."

At the sentencing hearing, the district judge found that

Wester was an organizer or leader, based on his capacity as a

top official at First Service and because the scheme likely

could not have taken place without Wester's leadership. From

this the court concluded that the enhancement was warranted,

without making any additional record finding as to whether

the enterprise involved five or more participants or was

"otherwise extensive."

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The court did adopt the presentence report by checking

the appropriate box, but the report is itself a source of

uncertainty. The initial report appears to rely on the "five

or more participants" prong, stating that Wester was the

organizer of criminal activity involving himself, Fredo,

George, Morgan, and then naming several other individuals

such as Morgan's accountant, George's lawyer, officials at

NEFR, and employees of First Service. There was no reliance

on other variables such as duration, number of episodes, or

amount.

Before sentencing, Wester objected to this finding on

the grounds that the necessary five participants must each be

criminally responsible, not merely involved, see United

States v. Graciani, 61 F.3d 70, 75 (1st Cir. 1995), and that

none of the persons named in the report beyond the four main

actors were criminally responsible for the relevant actions.

In response, the probation officer prepared an amended report

that took the position that Wester's activities were

"otherwise extensive" because of the number of individuals

directly involved and the necessary use of other unknowing

employees of First Service in order to effect the scheme.

But the amended report did not clearly abandon the

earlier position that there were also five or more

participants, and the district judge did not make clear which

of the report's two alternative grounds he was adopting. The

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problem is not that independent detailed findings by the

district court are required; rather, it is that we cannot

effectively review the decision to impose the four-level

increase without knowing the ground on which it rests.

United States v. Anh Van, 1996 WL 324615 at *3-4 (1st Cir.

June 18, 1996).

None of this would matter if the undisputed facts

required a finding that there were five criminally

responsible participants or that the activity was otherwise

extensive. But that is not the case here. On appeal, the

government concedes that the five participant requirement

cannot be met, and, in our view, the district court was not

compelled to find that the activity was "otherwise

extensive," a label that incorporates a number of variables

primarily within the ken of the district court. Anh Van,

1996 WL 324615 at *4.

On remand, the district court should address the

"otherwise extensive" issue in the course of resentencing.

The court is free to make new findings in support of its

earlier determination or to reconsider the adjustment

entirely, as it sees fit. Since resentencing will likely be

required based on the re-valuation of the bribes, we affirm

the convictions but vacate the existing sentence and remand

for resentencing.

It is so ordered.

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