United States v. Grossman

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

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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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