UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
____________
No. 94-30726
____________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
Cross-Appellant,
versus
EARL W. KRENNING, RICHARD P. RUSHTON,
and STEVEN L. SCHMITTZEHE,
Defendants-Appellants,
Cross-Appellees.
Appeal from the United States District Court
for the Eastern District of Louisiana
August 22, 1996
Before REAVLEY, KING, and EMILIO M. GARZA, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Defendants Earl W. Krenning, Richard P. Rushton, and Steven L.
Schmittzehe appeal their convictions for multiple counts of mail
fraud and for conspiracy to commit mail fraud. The Government
appeals the sentences imposed by the district court. We affirm the
Defendants’ convictions, vacate their sentences, and remand for
resentencing.
I
In late 1987, Krenning and a group of investors formed a new
Louisiana insurance company called Sovereign Fire and Casualty
Insurance Company (“Sovereign Insurance”). The investors also set
up a holding company, Sovereign Holding, Inc., which owned 100% of
the stock in Sovereign Insurance. The Commissioner of Insurance at
that time required a new domestic casualty insurance company to
have an initial reserve surplus of $1,500,000. In return for a
contribution of certain assets from a prior company and $150,000
cash, Krenning received a twenty-five percent interest in the
holding company, equal in value to $500,000. Krenning also allowed
one of the investors, Robert Dutschke, to contribute, in lieu of
cash, a building whose stated value, $685,000, was greatly
exaggerated.1 Finally, in order to obtain the certificate of
authority to operate an insurance company from the Commissioner of
Insurance, who retained discretion to deny an application even
after the $1,500,000 minimum had been met, Krenning delivered to
the Commissioner’s home in New Orleans an envelope containing
$10,000 in cash.2 The Commissioner of Insurance signed the
certificate of authority four days later.
Sovereign Insurance began operating in early 1988, with
1
In fact, the building had no net equity value once the mortgages were
subtracted from its true value. Dutschke was convicted of conspiracy and mail
fraud in March of 1995.
2
In an attempt to cover up the obvious bribe, Krenning later submitted
a letter to the Deputy Commissioner falsely naming a number of individuals who
supposedly contributed portions of the $10,000 to the Insurance Commissioner’s
campaign fund.
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Krenning as president and chief executive officer. Rushton was a
senior financial officer and headed up the claims department. The
company sold primarily “10/20/10" automobile insurance, which was
the minimum liability insurance required under Louisiana law. From
the beginning, there was considerable internal dissention between
Krenning and his fellow investors regarding the running of the
company. Sovereign Insurance’s performance suffered, and the
company’s inability to maintain adequate reserves meant that it
would soon not be permitted to sell further insurance policies. By
the end of 1988, the shareholders in Sovereign Holding had reached
a consensus that Krenning should be forced to resign. Instead,
Krenning and two other shareholders, including Rushton, offered to
purchase the entirety of the dissatisfied shareholders’ stock and
debentures for roughly $1,500,000. After an initial attempt to
purchase the stock using stolen bank drafts, Krenning eventually
successfully executed the transaction using approximately $900,000
of Sovereign Insurance’s own funds.
Having depleted the company’s reserve fund, Krenning and
Rushton immediately began to experience difficulties in making
timely claims payments. At this time, Sovereign Insurance had
close to a $1 million reserve deficiency which needed to be
addressed before the annual statement was prepared as of the year’s
end. Without an adequate reserve surplus, the Commissioner of
Insurance would soon take control of the company and shut it down.
Accordingly, Krenning and Rushton carried out the first of several
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schemes designed to place worthless or overvalued assets on the
books of Sovereign Insurance in order to conceal the deficiency
from the Department of Insurance, and thereby continue to operate
as an insurance company.
In what became known as the “Falcon Pipeline Deal,” a
promissory note was executed indicating that Sovereign Insurance
loaned Falcon Pipeline Company, Inc. (“Falcon”) $500,000, although
no loan was actually made. The loan was collateralized by a
mortgage on a pipeline owned by Falcon and valued by Krenning and
Rushton on Sovereign Insurance’s quarterly and annual financial
statement at over $750,000. The pipeline had not been in use since
1984, and the estimated salvage value of the pipeline and attached
easements, leases, compressors and dehydration facility was put at
$18,000. At the same time, Falcon purchased a two-year 9%
debenture note from Sovereign Holdings on basically the same terms
and conditions as the promissory note between Falcon and Sovereign
Insurance.
A side agreement was created between Sovereign Insurance and
Falcon which indicates the true nature of the transaction between
the parties. Falcon paid Sovereign Holdings nothing for the
debenture note. Instead, Sovereign Holding made two monthly
payments to Falcon. The first, an interest payment, was
immediately retransmitted from Falcon to Sovereign Insurance under
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the first loan agreement.3 The second, a $5,000 monthly management
fee, was retained by Falcon as its payment for the insurance
company’s use of the pipeline asset. In essence, Sovereign
Insurance “rented” the asset from Falcon. The debt appeared only
on Sovereign Holding’s balance sheet, while Sovereign Insurance was
able to show an asset, falsely valued at $500,000. The side
agreement also provided that the pipeline mortgaged to Sovereign
Insurance under the first loan agreement was not at risk if the
insurance company should become impaired or insolvent. Finally,
the entire series of transactions were then backdated to December
of 1988, in order to allow Sovereign Insurance to claim the asset
on its 1988 annual statement to the Commissioner of Insurance.4
Before Sovereign Insurance was finally liquidated in May of
1991, several similar deals were executed placing overvalued or
nonexistent assets on the books of Sovereign Insurance. All of
these subsequent deals took place after Schmittzehe joined
Sovereign Insurance in April of 1989 as comptroller and, later, as
treasurer. The “Marble Falls Deal” involved the “renting” of a
$450,000 mortgage secured by a convention center in Arkansas, the
appraisal value of which, $1.9 million, was based on conditions
which were never fulfilled. Here too a side agreement was executed
3
Sovereign Holding also made principal payments to Falcon four times
a year, which were similarly retransmitted to Sovereign Insurance under the first
loan agreement.
4
There was also evidence that the 1988 annual statement was
manipulated to further obscure the reserve deficiency.
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explaining the true nature of the transaction, and assurances were
given that the property was not at risk in the event of foreclosure
on the underlying note. As the situation grew more dire, the
Defendants resorted to listing four mortgage-backed debenture notes
totalling $1.28 million (the “Torrey Deal”). Although the Torrey
Deal was in fact never completed, the Defendants specifically
stated on the 1990 annual statement that it had been “consummated.”
The Defendants also listed four short-term promissory notes
supposedly collateralized by Bay Agency/Sunbelt property, totalling
$720,000. These notes, which had no real economic substance, were
backdated for purposes of listing them on the 1990 annual
statement, and were then later canceled by Schmittzehe. In this
manner Sovereign Insurance continued to operate, selling insurance
policies until the company finally collapsed in May of 1991.
Several thousand unpaid claims totalling an estimated $9 million
remained unpaid following the liquidation of Sovereign Insurance.
A grand jury issued a fifteen count indictment charging
Krenning, Rushton, Schmittzehe, Robert V. Bishop, Sr., and George
C. Cavin, Jr., with mail fraud, in violation of 18 U.S.C. § 1341
(counts one through thirteen); and with conspiracy to commit mail
fraud, in violation of 18 U.S.C. § 371 (count fifteen).5 A jury
returned a verdict of guilty as to Krenning, Rushton, and
5
Count fourteen charged all the defendants except for Cavin with money
laundering, in violation of 18 U.S.C. § 1957, and was dismissed shortly before
trial.
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Schmittzehe on all counts. Bishop and Cavin were acquitted on all
counts. Krenning received a sentence of seventy-one months, and
was ordered to pay $100,000 in restitution. Schmittzehe received
a sentence of thirty-seven months, and was ordered to pay $50,000
in restitution. Rushton received a sentence of forty-six months,
and was ordered to pay $10,000 in restitution. All defendants
filed timely notices of appeal. The Government also filed a timely
notice of appeal, alleging errors in sentencing.
II
All three Defendants challenge their convictions on
sufficiency of the evidence grounds. Accordingly, we must
determine “whether, after viewing the evidence and all inferences
that may reasonably be drawn from it in the light most favorable to
the prosecution, any reasonably minded jury could have found that
the defendant was guilty beyond a reasonable doubt.” United States
v. Leahy, 82 F.3d 624, 633 (5th Cir. 1996) (internal quotation
marks omitted). The evidence need not exclude every reasonable
theory of innocence or be entirely inconsistent with every
conclusion except that of guilt. Id. If a reasonable trier of
fact could find the defendant guilty beyond a reasonable doubt
based on the evidence presented at trial, we will affirm the
conviction. United States v. Smith, 930 F.2d 1081, 1085 (5th Cir.
1991); United States v. Triplett, 922 F.2d 1174, 1177 (5th Cir.),
cert. denied, 500 U.S. 945, 111 S. Ct. 2245, 114 L. Ed. 2d 486
-7-
(1991).
A
Krenning contends that there was insufficient evidence to
support his convictions for mail fraud and conspiracy to commit
mail fraud. A conviction for conspiracy under 18 U.S.C. § 371
requires the Government to prove beyond a reasonable doubt (1) an
agreement between two or more persons, (2) to commit a crime
against the United States, and (3) an overt act in furtherance of
the agreement committed by one of the conspirators. United States
v. Mackay, 33 F.3d 489, 493 (5th Cir. 1994). A conviction for mail
fraud under 18 U.S.C. § 1341 requires the Government to prove
beyond a reasonable doubt (1) a scheme to defraud, (2) which
involved use of the mails, and (3) that the mails were used for the
purpose of executing the scheme. United States v. Pazos, 24 F.3d
660, 665 (5th Cir. 1994). Each use of the mails to further a
scheme to defraud constitutes a separate offense under the statute.
Id.
Krenning concedes that there was sufficient evidence presented
at trial from which a reasonable jury could find beyond a
reasonable doubt that he participated in a scheme to defraud and
that he had the specific intent to commit fraud. Krenning argues,
however, that there was no evidence that the mailings were made for
the purpose of executing the scheme to defraud because the jury
never had the opportunity to actually read the mailings which
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formed the basis for the mail fraud conviction. We find no merit
to this argument.
All the parties stipulated at trial that the mailings
described in counts one through thirteen of the indictment did
occur on or about the dates indicated therein.6 The indictment
stated that the Defendants caused to be mailed “insurance policies,
applications, finance agreements, claims, premium payments, premium
deposits, and insurance related materials” to the thirteen
individuals listed in counts one through thirteen.7 These
documents were essential to Sovereign Insurance’s task of selling
insurance. By “renting” overvalued assets and reporting them on
the annual statements to the Commissioner of Insurance, the
Defendants were able to disguise the insolvent nature of their
insurance company. Without these mailings to the insureds,
however, the Defendants would equally not have been able to
continue selling worthless insurance policies, the financial object
of their scheme.8 Accordingly, we conclude that there was
6
The parties further stipulated that the individuals named in counts
one through eight and ten through thirteen were policy holders with Sovereign
Insurance, and that claims submitted by those policyholders to Sovereign
Insurance remained unpaid.
7
See United States v. Green, 494 F.2d 820, 824 (5th Cir.) (“One
'causes' the mails to be used when one does an act with knowledge that the use
of the mails will follow in the ordinary course of business, or where such use
can reasonably be foreseen, even though not actually intended . . . .”) (internal
citation and quotation marks omitted), cert. denied, 419 U.S. 1004, 95 S. Ct.
325, 42 L. Ed. 2d 280 (1974).
8
See Pereira v. United States, 347 U.S. 1, 8, 74 S. Ct. 358, 363, 98
L. Ed. 435 (1954) (holding that the mailing element is satisfied by a mailing
which is “incident to an essential part of the scheme”).
-9-
sufficient evidence for the jury to conclude that the mailings in
counts one through thirteen were in furtherance of the Defendants’
scheme to defraud.
Alternatively, Krenning argues that these mailings fall within
the “innocent mailings” or “statutory duty” exception to the mail
fraud statute first recognized by the Supreme Court in Parr v.
United States, 363 U.S. 370, 80 S. Ct. 1171, 4 L. Ed. 2d 1277
(1960). There is no general rule that innocent or routine mailings
cannot supply the mailing element under the statute. Schmuck v.
United States, 489 U.S. 705, 714-15, 109 S. Ct. 1443, 1450, 103 L.
E. 2d 734 (1989). Rather, the exception in Parr applies only where
the mailings are both not themselves false or fraudulent, and their
mailing is required by law. United States v. Curry, 681 F.2d 406,
412 (5th Cir. 1982). Parr involved the mailing of legitimate tax
notices and receipt of tax payments by a Texas school board engaged
in embezzling some of the tax money collected by the school
district. The Supreme Court reversed the defendants’ mail fraud
convictions based on these mailings, in part because the defendants
were required by state law to cause the tax related mailings.
Parr, 363 U.S. at 390-91, 80 S. Ct. at 1183-84.
This Court has previously noted, however, that in Parr the tax
mailings would have occurred irrespective of the defendants’ scheme
to embezzle the school district’s money. United States v. Bright,
588 F.2d 504, 509 (5th Cir.), cert. denied, 440 U.S. 972, 99 S. Ct.
-10-
1537, 59 L. Ed. 2d 789 (1979). In Bright, we concluded that the
“innocent mailings” exception does not apply where the legal
requirement to make the mailings is triggered by the fraudulent
scheme. See id. at 509-10 (“If [the defendants] had not decided to
defraud the estate of their late cousin, they would not have had to
comply with the state law requiring them to file the creditors’
notice.”); see also Schmuck, 489 U.S. at 713 n.7, 109 S. Ct. at
1449 n.7 (distinguishing Parr by noting that the mailing of the tax
documents “would have been made regardless of the defendants’
fraudulent scheme,” whereas the mailings at issue were “derivative”
of Schmuck’s fraudulent scheme and “would not have occurred but for
that scheme”).
Even assuming there existed a statute requiring Sovereign
Insurance to mail the policies and related documents to the
insureds, we conclude that none of the mailings would have occurred
but for the Defendants’ scheme to fraudulently disguise the
insurance company’s reserve deficiency. Absent this scheme,
Sovereign Insurance would have been shut down by the Commissioner
as early as the beginning of 1989. The continuing need to mail
policies out to new customers was therefore entirely derivative of
the Defendants’ decision to fraudulently operate an insolvent
insurance company. Accordingly, we find that the “innocent
mailings” exception to the mail fraud statute does not apply to the
Defendants’ conduct. Having reviewed the record, we conclude that
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there was sufficient evidence from which a reasonable jury could
have found Krenning guilty of mail fraud and conspiracy to commit
mail fraud.
B
Rushton argues that there was insufficient evidence to
establish that he had the requisite intent under both the
conspiracy and substantive mail fraud counts. A conviction for
conspiracy under 18 U.S.C. § 371 requires that the Government prove
beyond a reasonable doubt that “the defendant knew about the
conspiracy and that he voluntarily became part of it.” United
States v. Mackay, 33 F.3d 489, 493 (5th Cir. 1994) (internal
quotation marks omitted). The Government may prove the conspiracy
through circumstantial evidence, and the agreement need not be
formal or spoken. Id. The Government must do more, however, than
merely “pile inference upon inference upon which to base the
conspiracy charge.” Id. (internal quotation marks omitted).
Likewise, the mail fraud conviction requires that the Government
prove “not only that there was fraudulent activity but also that
the defendant had a conscious knowing intent to defraud.” United
States v. Kreimer, 609 F.2d 126, 128 (5th Cir. 1980) (internal
quotation marks omitted).
Evidence presented at trial established that Rushton
participated in the formation of Sovereign Insurance and was
involved in the buy out of the dissatisfied investors which led to
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the insurance company’s insolvency. Rushton warned the investors
that Krenning was trying to use the company’s own money to buy them
out, and yet he later joined Krenning in the buy out and signed
documents detailing the true nature of the transaction. As
corporate secretary for both Sovereign Holdings and Sovereign
Insurance, Rushton signed the debenture note given to Falcon, as
well as several checks making payment of the debt service and
management fees. Rushton also signed the 1988 annual statement
listing the falsely inflated Falcon Pipeline mortgage.
The evidence also established that in April of 1989, Rushton
requested a real estate appraisal for the Dutschke building, which
has been listed on the 1988 annual statement as having a gross
value of $685,000 and a net equity value of $250,000. The
appraisal, sent to Rushton the following month, valued the Dutschke
building at $305,000, which meant that it had no net equity value.
Nonetheless, Rushton continued to sign quarterly statements and the
1989 annual statement declaring the Dutschke building to have a net
equity value of $250,000.
Finally, Rushton was an active participant in the Torrey Deal;
his sale of stock and his signature on the documents were required
to complete the deal. Even though the documents were never signed,
and the deal was never completed, Rushton signed the 1990 annual
statement to the Commissioner of Insurance attesting that the
Torrey Deal had been completed and listing related mortgages
totalling $1.28 million. In May of 1991, Rushton signed an amended
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1990 annual statement removing the Torrey mortgages.
Based on this evidence, we find that Rushton’s involvement in
the fraud conspiracy is neither so slight nor so tenuous as to make
unreasonable an inference of knowing complicity. Accordingly, we
conclude that there was sufficient evidence for the jury to find
beyond a reasonable doubt that Rushton knew about the conspiracy
and voluntarily became a part of it. We also conclude that there
was sufficient evidence from which a reasonable jury could find
that Rushton had a conscious knowing intent to defraud.
C
Schmittzehe contends that there was insufficient evidence to
support his convictions for mail fraud and conspiracy to commit
mail fraud. Once the Government has produced evidence of an
illegal conspiracy, “it need only introduce ‘slight evidence’ to
connect an individual defendant to the common scheme.” United
States v. Leahy, 82 F.3d 624, 633-34 (5th Cir. 1996) (internal
quotation marks omitted); United States v. Duncan, 919 F.2d 981,
991 (5th Cir. 1990), cert. denied, 500 U.S. 926, 111 S. Ct. 2036,
114 L. Ed. 2d 121 (1991). The evidence, however, must be
sufficient for a reasonable jury to infer that the defendant knew
about the conspiracy and voluntarily agreed to join. Duncan, 919
F.2d at 991.
Schmittzehe, who was a CPA, joined Sovereign Insurance in
April of 1989 as its comptroller; by the filing of the September
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1989 quarterly statement, he was acting as treasurer, a position he
maintained until the insurance company was liquidated. In the
middle of May that year, Schmittzehe signed, as assistant
treasurer, the March 31, 1989 quarterly statement declaring the
Falcon Pipeline to be valued at $750,000. He also signed as
treasurer the 1989 and 1990 annual statements listing the Falcon
Pipeline mortgage as a valid asset.
Schmittzehe was the sole representative of Sovereign Holdings
and Sovereign Insurance present at the closing of the Marble Falls
Deal in July of 1989. During the closing, Schmittzehe affirmed to
John Nielsen, whose company owned the Marble Falls mortgaged
property, that the debenture would offset the note and mortgage
held by Sovereign Insurance if Sovereign Holdings stopped paying,
and that therefore the property was not at risk of foreclosure.9
The Government also submitted a letter and some handwritten notes
written by Schmittzehe which established that he was intimately
familiar with the structure and purpose of these “renting”
9
Nielsen had also insisted that an additional paragraph to this effect
be inserted in the mortgage agreement:
It is understood and agreed that upon termination of this agreement
and tender of Sovereign Holdings, Inc.’s 10 (ten) year 12% (twelve
per cent) [sic] Debenture by Marble Falls Resort and Campground,
Inc., Sovereign Holdings, Inc. shall satisfy the debt of Marble
Falls Resort and Campground, Inc. then owing to Sovereign Fire and
Casualty Insurance Company and cause the release of any property
securing said debt.
At the closing, Schmittzehe signed the mortgage agreement on behalf of Sovereign
Holdings. Although the closing took place during the first week of July, the
documents were all backdated to June 30, 1989.
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transactions.10 In reviewing the proposed documents for the Torrey
Deal, Schmittzehe noted several problems, including the fact that
Sovereign Insurance’s legal counsel was uncomfortable giving any
legal opinion regarding the transaction since he had knowledge of
potential backdating of documents and felt such conduct could be an
ethics violation. Schmittzehe’s suggested “Remedy” was: “Get rid
of all these requirements, get an unethical lawyer, or get a lawyer
who doesn’t know the entire transaction.”11 Finally, Schmittzehe
also signed the 1990 annual return listing the Torrey Deal
mortgages as “consummated” even though the deal was never
completed.
Viewing the record in the light most favorable to the jury
verdict, we find that there is ample evidence from which a
reasonable jury could infer that Schmittzehe knew about the
10
The letter concluded, “The net result of this transaction was to
create $400,000 of additional capital in the insurance company without requiring
additional funds.”
11
Schmittzehe argues that the district court erred in admitting his
handwritten notes regarding problems with the proposed Torrey Deal documents.
We review a district court’s decision that evidence is relevant and admissible
for abuse of discretion. United States v. Castillo, 77 F.3d 1480, 1496 (5th Cir.
1996). In addition to the problem of Sovereign Insurance’s legal counsel feeling
uncomfortable giving legal opinions regarding the transaction, the notes also
address various other aspects of the initial debenture purchase agreement,
including the fact that, as drafted, it did not maintain the fiction that the
Torrey Deal consisted of separate agreements. The district court concluded that
the handwritten notes were admissible to demonstrate Schmittzehe’s state of mind,
that is, his specific intent to defraud. The district court also concluded that
the evidence was relevant to rebut Schmittzehe’s defense that he relied on advice
of counsel. We agree. See, e.g., United States v. Cohen, 544 F.2d 781, 786 (5th
Cir.) (concluding letter was admissible to show state of mind), cert. denied, 431
U.S. 914, 97 S. Ct. 2175, 53 L. Ed. 2d 224 (1977); United States v. Baumgarten,
517 F.2d 1020, 1027-28 (8th Cir.) (same), cert. denied, 423 U.S. 878, 96 S. Ct.
152, 46 L. Ed. 2d 111 (1975). Accordingly, we find that the district court did
not abuse its discretion in admitting Schmittzehe’s handwritten notes.
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conspiracy and voluntarily decided to join.12 Accordingly, we hold
that there was sufficient evidence from which a reasonable jury
could conclude that Schmittzehe was guilty beyond a reasonable
doubt of mail fraud and conspiracy to commit mail fraud.
III
Rushton and Schmittzehe both contend that the district court
erred in not granting their motion for severance, pursuant to FED.
R. CRIM. P. 14. When defendants have been properly joined under
FED. R. CRIM. P. 8(b), “a district court should grant a severance
under Rule 14 only if there is a serious risk that a joint trial
would compromise a specific trial right of one of the defendants,
or prevent the jury from making a reliable judgment about guilt or
innocence.” Zafiro v. United States, 506 U.S. 534, ___, 113 S. Ct.
933, 938, 122 L. Ed. 2d 317 (1993). Accordingly, where joinder is
proper in the first instance, we will review only for abuse of
discretion. United States v. McCord, 33 F.3d 1434, 1452 (5th Cir.
1994), cert. denied, __ U.S. __, 115 S. Ct. 2558, 132 L. Ed. 2d 812
(1995).
Rule 8(b) provides that “[t]wo or more defendants may be
charged in the same indictment or information if they are alleged
12
Schmittzehe argues that he at all times merely relied on the advice
of Sovereign Insurance’s legal counsel and other experts involved in structuring
these deals. The evidence presented at trial on this issue was conflicting,
however, and the jury was entitled to reject Schmittzehe’s defense. Likewise,
the jury was entitled to credit the testimony of Nielsen as to what Schmittzehe
represented at the closing of the Marble Falls Deal, even though the Defendants
presented substantial impeachment evidence with respect to this witness.
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to have participated in the same act or transaction or in the same
series of acts or transactions constituting an offense or
offenses.” FED. R. CRIM. P. 8(b). Furthermore, “Such defendants
may be charged in one or more counts together or separately and all
of the defendants need not be charged in each count.” Id. The
interests of efficiency and justice have led to a preference in the
federal system for joint trials of defendants who are indicted
together. Zafiro, 506 U.S. at ___, 113 S. Ct. at 937.
Schmittzehe argues that because he joined Sovereign Insurance
well after the $10,000 bribe and the stock buy out of the
dissatisfied investors had taken place, neither of these events had
any probative bearing on any crimes alleged against him personally.
Schmittzehe also contends that the indictment alleged, and the
proof submitted at trial established, multiple conspiracies: (1) to
obtain a certificate of authority to sell insurance; (2) to gain
control of the company through the buy out; and (3) to provide for
the continued operation of the insurance company through fraudulent
reporting. Rule 8(b) does not require, however, that each
defendant have participated in the same act or acts. United States
v. Dennis, 645 F.2d 517, 520 (5th Cir. Unit B), cert. denied, 454
U.S. 1034, 102 S. Ct. 573, 70 L. Ed. 2d 478 (1981); see also United
States v. Lindell, 881 F.2d 1313, 1318 (5th Cir. 1989) (“The fact
that an indictment does not charge each appellant with active
participation in each phase of the conspiracy does not constitute
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misjoinder.”), cert. denied, 496 U.S. 926, 110 S. Ct. 2621, 110 L.
Ed. 2d 1056 (1990). All that is required is “a series of acts
unified by some substantial identity of facts or participants.”
Dennis, 645 F.2d at 520 (internal quotation marks omitted). The
indictment did not allege multiple conspiracies, but rather a
single scheme with multiple purposes.13 Moreover, the evidence of
how Sovereign Insurance was established and Krenning and Rushton
gained control through the buy out was relevant to establishing the
overall scheme to defraud. Accordingly, we find that joinder was
proper under Rule 8(b).
Relief from prejudicial joinder may be had under Rule 1414 if
the defendant can demonstrate “specific and compelling prejudice.”
McCord, 33 F.3d at 1452. In order to demonstrate that the district
court abused its discretion by failing to grant a motion for
13
The indictment charged:
The primary objects and purposes of the conspiracy, among
others, were:
1. To obtain a certificate of authority to sell insurance
within the State of Louisiana.
2. To provide for the continued operation of Sovereign Fire
even though Sovereign Fire was unable to timely pay valid claims
submitted to the company.
14
Rule 14 states in pertinent part:
If it appears that a defendant or the government is prejudiced
by a joinder of offenses or of defendants in an indictment or
information or by such joinder for trial together, the court may
order an election or separate trials of counts, grant a severance of
defendants or provide whatever other relief justice requires.
FED. R. CRIM. P. 14. As the Supreme Court has noted, “Rule 14 does not require
severance even if prejudice is shown; rather, it leaves the tailoring of the
relief to be granted, if any, to the district court’s sound discretion.” Zafiro,
506 U.S. at __, 113 S. Ct. at 938.
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severance, the defendant must show that: “(1) the joint trial
prejudiced him to such an extent that the district court could not
provide adequate protection; and (2) the prejudice outweighed the
government’s interest in economy of judicial administration.” Id.
Both Schmittzehe and Rushton have failed to make the necessary
showing.
Rushton essentially argues that the disparity between his own
culpability and that of his co-defendants, along with the
complexity of the case, prejudiced him to such an extent that his
trial was rendered unfair. However, “A quantitative disparity in
the evidence does not by itself warrant severance nor does the mere
presence of a spillover effect.” United States v. Mitchell, 31
F.3d 271, 277 (5th Cir.), cert. denied, __ U.S. __, 115 S. Ct. 455,
130 L. Ed. 2d 363 (1994). We also find that the district court
cured whatever risk there was of prejudice with proper jury
instructions.15 See Zafiro, 506 U.S. at __, 113 S. Ct. at 939
15
Among other things, the district court carefully instructed the jury
that it must give separate consideration to the evidence as to each defendant,
that each charge and the evidence pertaining to it should be considered
separately, and the fact that the jury may find a particular defendant guilty or
not guilty as to one of the offenses charged should not control the jury’s
verdict as to any other offense charged. The district court also instructed the
jury that the mere fact that Defendants Schmittzehe, Rushton, and Krenning
operated and managed Sovereign Insurance together, and associated with others
employed there, and discussed common aims and interests with others, did not
necessarily establish proof of a conspiracy.
Moreover, we note, without expressing any approval, that at the specific
request of Schmittzehe, the district court also instructed the jury that it could
not consider against Schmittzehe, Bishop, or Cavin any of the evidence of the
$10,000 payment to the Commissioner of Insurance, or the alleged stock purchase
from the other shareholders. Cf. United States v. Netterville, 553 F.2d 903, 912
(5th Cir. 1977) (holding that once a defendant becomes associated with a
conspiracy he is responsible for all of the acts of the conspiracy, even those
which occurred before or after his association with the conspiracy), cert.
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(concluding that similar instructions were sufficient to cure any
possibility of prejudice); Mitchell, 31 F.3d at 276 (same).
Finally, the acquittal of Bishop and Calvin supports the inference
that the jury was able to sort and consider separately the evidence
against each of the defendants. See McCord, 33 F.3d at 1452
(concluding that the acquittal of each of the defendants on at
least one count reflected that the jury was able to consider the
evidence separately as to each defendant and each count). Rushton
and Schmittzehe have failed to demonstrate specific and compelling
prejudice. Accordingly, we hold that the district court did not
abuse its discretion in denying their Rule 14 motion for severance.
IV
Schmittzehe argues that district court erred by denying his
motion for a new trial based on newly discovered evidence. Such
motions are generally disfavored by the courts, and we view them
with great caution. United States v. Pena, 949 F.2d 751, 758 (5th
Cir. 1991). We will reverse the district court’s denial of a
motion for a new trial only when there is a “clear abuse of
discretion.” Id. Newly discovered evidence may warrant a new
trial if: (1) the evidence was discovered after trial; (2) the
failure to discover the evidence was not due to lack of diligence
by the defendant; (3) the evidence is material, and not merely
cumulative or impeaching; and (4) the evidence would probably lead
denied, 434 U.S. 1009, 98 S. Ct. 719, 54 L. Ed. 2d 752 (1978).
-21-
to an acquittal. United States v. Williams, 985 F.2d 749, 757 (5th
Cir.), cert. denied, 510 U.S. 950, 114 S. Ct. 148, 126 L. Ed. 2d
110 (1993).
Schmittzehe contends that the settlement documents in a
separate lawsuit filed by the Commissioner of Insurance against
John Nielsen, seeking to enforce Sovereign Insurance’s mortgage and
foreclose on the Marble Falls property, reveal that the Government
took a position contrary to the one they asserted at trial.
Schmittzehe claims that these documents disclose for the first time
that the Internal Revenue Service took the position that Sovereign
Insurance had a valid first lien and mortgage on the Marble Falls
property. Contrary to what Schmittzehe argues, however, the
Government argued at his trial that the Marble Falls deal was
fraudulent, not because the insurance company had failed to obtain
a first lien on the property, but because the parties agreed that
the property was not at risk, and because the value of the property
was overstated. Moreover, the Defendants presented evidence that
Sovereign Insurance had obtained a valid first lien on the
property. They also brought out on cross-examination that the IRS
had filed an answer in the aforementioned lawsuit acknowledging
that its tax lien was inferior to the Commissioner of Insurance’s
lien on the property. Although Schmittzehe could not have
discovered the settlement documents prior to trial, we find that
this evidence of the Government’s position with respect to
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Sovereign Insurance’s lien on the Marble Falls property is merely
cumulative and would not likely result in an acquittal for
Schmittzehe if he were given a new trial. Accordingly, we hold
that the district court did not abuse its discretion in denying
Schmittzehe’s motion for a new trial based on newly discovered
evidence.16
V
The Government cross-appeals from the district court’s loss
calculation for purposes of sentencing under U.S.S.G. § 2F1.1.17
The Presentence Report (“PSR”) recommended that the base offense
level for each Defendant be increased by 15 levels based on a
calculated loss of $14,867,934.26.18 The district court rejected
the PSR’s recommendation and instead appeared to calculate the loss
attributable to each defendant based on the false or inflated value
of the “rented” or nonexistent asset reported on Sovereign
16
Finally, Schmittzehe and Rushton contend that the district court
lacked subject matter jurisdiction in this case because of § 2(b) of the
McCarran-Ferguson Act, 15 U.S.C. § 1012(b). This argument is foreclosed by
United States v. Cavin, 39 F.3d 1299, 1305 (5th Cir. 1994) (holding that the
preemption provision of the Act does not apply to a fraud prosecution because
there is no conflict with state insurance regulation).
17
In cases involving fraud or deceit, the Sentencing Guidelines provide
for a graduated increase in the base offense level according to the amount of the
loss. See U.S.S.G. § 2F1.1.
18
Defense counsel stipulated at trial that this loss amount included
the entire projected loss to the Louisiana Insurance Guarantors Association,
including outstanding claims, unpaid premiums and estimated settlements on future
claims.
-23-
Insurance’s annual and quarterly statements.19 We give considerable
deference to a district court’s factual findings at sentencing, and
we will reverse only if they are clearly erroneous. United States
v. Robichaux, 995 F.2d 565, 571 (5th Cir.), cert. denied, 510 U.S.
922, 114 S. Ct. 322, 126 L. Ed. 2d 268 (1993). A factual finding
is not clearly erroneous as long as it is plausible in light of the
record read as a whole. Id. The commentary to § 2F1.1 states that
“the loss need not be determined with precision. The court need
only make a reasonable estimate of the loss, given the available
information.” U.S.S.G. § 2F1.1, comment. (n.8).
In deciding whether the district court arrived at a reasonable
estimate of the loss attributable to the Defendants’ fraud scheme,
we must first determine whether the court used an acceptable method
of calculating the amount of loss. See United States v. Henderson,
19 F.3d 917, 927-29 (5th Cir.) (remanding for resentencing because
19
In its “Statement of Reasons for Imposing Sentence,” the district
court merely stated that as to loss amount, “the Court determines that Mr.
Krenning should be held liable for losses stemming from the Marble Falls
transaction, the Bay-Sunbelt transaction, the Falcon Pipeline transaction, the
Dutschke building, and the Torrey Group mortgages, for a total of $2.8 million
losses to the company.” Based on this loss amount, the district court added 13
levels to Krenning’s base offense level.
The district court determined that “Mr. Rushton should be held liable for
losses stemming from the Marble Falls transaction, the Bay-Sunbelt transaction,
the Falcon Pipeline transaction, the Dutschke building, and the Torrey Group
Mortgages, for a total of $2.8 million in losses to the company.” Based on this
loss amount, the district court added 13 levels to Rushton’s base offense level.
Finally, the district court determined that “Mr. Schmittzehe should be held
liable only for losses stemming from the Marble Falls transaction and the Bay-
Sunbelt transaction, for a total of $850,000 losses to the company.” Based on
this loss amount, the district court added 11 levels to Schmittzehe’s base
offense level. We note that the district court did not explain why, based on its
method of calculating loss, it decided not to attribute the Torrey Group
transaction “losses” to Schmittzehe as well.
-24-
the district court used a legally flawed method of calculating the
loss), cert. denied, __ U.S. __, 115 S. Ct. 207, 130 L. Ed. 2d 137
(1994). The Sentencing Guidelines clearly contemplate that the
method used to calculate the amount of loss will vary according to
the type of fraud at issue in the case. See U.S.S.G. § 2F1.1,
comment. (n.7) (providing examples of fraud where additional
factors are to be considered in determining the loss or intended
loss).20 The method used to calculate the amount of loss, however,
must bear some reasonable relation to the actual or intended harm
of the offense.21 Whatever method is employed, the focus of the
loss calculation should be on the harm caused to the victim of the
fraud. United States v. Orton, 73 F.3d 331, 333 (11th Cir. 1996).
Having carefully reviewed the record, we conclude that the
20
The commentary to the Sentencing Guidelines also provides that the
reasonable estimate of loss:
for example, may be based on the approximate number of victims and
an estimate of the average loss to each victim, or on more general
factors, such as the nature and duration of the fraud and the
revenues generated by similar operations. The offender’s gain from
committing the fraud is an alternative estimate that ordinarily will
underestimate the loss.
U.S.S.G. § 2F1.1, comment. (n.8)
21
See U.S.S.G. § 2F1.1, comment. (n.7) (stating that “if an intended
loss that the defendant was attempting to inflict can be determined, this figure
will be used if it is greater than the actual loss”); see also Henderson, 19 F.3d
at 928 (concluding that the Sentencing Guidelines refer to actual intent, not
constructive intent); United States v. Tedder, 81 F.3d 549, 551 (5th Cir. 1996)
(“Where the defendant intends to repay the loans, then actual loss, rather than
intended loss, is the appropriate basis for calculating loss under § 2F1.1.”).
Although the Sentencing Guidelines recognize the offender’s gain from committing
the fraud as a possible alternative method of calculating the loss amount, see
United States v. Smithson, 49 F.3d 138, 143 (5th Cir. 1995), the commentary to
the Guidelines also states, “The offender’s gain from committing the fraud is an
alternative estimate that ordinarily will underestimate the loss.” U.S.S.G.
§ 2F1.1, comment. (n.8).
-25-
district court’s method of calculating the amount of loss in this
case bears no reasonable relation to the actual or intended harm of
the offense. In its “Statement of Reasons for Imposing Sentence,”
the district court stated that it was holding the Defendants liable
for “losses to the company.”22 The district court does not explain
how the “losses to the company” are related to the harm inflicted
on the insureds. Moreover, we are unable to determine how the
falsely inflated values of the “rented” assets))which the district
court appears to equate with “losses to the company”))relate to the
loss caused by the Defendants’ fraud scheme. Defendants argue that
the district court’s calculation method was consistent with
Application Note 7(a) to § 2F1.1 for “Fraud Involving
Misrepresentation of the Value of an Item or Product Substitution.”
U.S.S.G. § 2F1.1, comment. (n.7). Where a fraud involves the
misrepresentation of the value of an item, the Sentencing
Guidelines suggest that the loss is the amount by which the item
was overvalued. Id. This method of loss calculation, however, is
appropriate only where the overstated value is the actual object of
the fraud, for example through a sale or exchange of the overvalued
item.23
22
See supra note 19.
23
See U.S.S.G. § 2F1.1, comment. (n.7):
Where, for example, a defendant fraudulently represents that stock
is worth $40,000 and the stock is worth only $10,000, the loss is
the amount by which the stock was overvalued (i.e., $30,000). In a
case involving a misrepresentation concerning the quality of a
consumer product, the loss is the difference between the amount paid
-26-
In the present case, the overvalued or nonexistent mortgage
properties were merely the mechanism through which the Defendants
disguised the insolvent condition of their insurance company and
thereby continued to sell insurance policies to the public. The
harm to the public, and ultimately the State of Louisiana, was the
losses to individual insureds caused by the sale of insurance
policies backed by an insolvent insurance company. The district
court’s method of calculating the amount of loss is therefore
flawed, in this case, to the extent that it focuses on the “losses
to the company” or the overstated value of the assets reported on
Sovereign Insurance’s annual and quarterly statements.24
Accordingly, we reverse the district court’s findings as to loss
amount and remand for resentencing.
VI
The Government also cross-appeals from the district court’s
refusal to apply, as to each defendant, a four-point enhancement
for jeopardizing the safety and soundness of a financial
institution, under U.S.S.G. § 2F1.1(b)(6). We review de novo the
by the victim for the product and the amount for which the victim
could resell the product received.
24
Cf. United States v. Hill, 42 F.3d 914, 918-19 (5th Cir.) (affirming
district court’s determination that loss amount was the fraudulent face value of
securities, rather than amount paid by victims to “rent” the worthless
securities), cert. denied, __ U.S. __, 116 S. Ct. 130, 133 L. Ed. 2d 79 (1995);
United States v. Chappell, 6 F.3d 1095, 1101 (5th Cir. 1993) (affirming the
district court’s determination that loss amount was stated value of the
fraudulent checks plus their average value times the fifty-one blank checks also
attributable to defendants), cert. denied, __ U.S. __, 114 S. Ct. 1235, 127 L.
Ed. 2d 579 (1994).
-27-
district court’s application of the Sentencing Guidelines, and we
will affirm the district court’s factual findings unless they are
clearly erroneous. United States v. Clements, 73 F.3d 1330, 1338
(5th Cir. 1996).
Section 2F1.1(b)(6) provides: “If the offense substantially
jeopardizes the safety and soundness of a financial institution .
. . increase by 4 levels. If the resulting offense level is less
than level 24, increase to level 24.” U.S.S.G. § 2F1.1(b)(6)(A).
The commentary to § 2F1.1(b)(6) provides:
An offense shall be deemed to have “substantially
jeopardized the safety and soundness of a financial
institution” if, as a consequence of the offense, the
institution became insolvent; substantially reduced
benefits to pensioners or insureds; was unable on demand
to refund fully any deposit, payment, or investment; was
so depleted of its assets as to be forced to merge with
another institution in order to continue active
operations; or was placed in substantial jeopardy of any
of the above.
U.S.S.G. § 2F1.1(b)(6), comment. (n.15). The district court,
explicitly following the reasoning of Judge Mitchell in United
States v. McDermott, declined to apply the four-point enhancement
in the context of an institution that was already insolvent when
the criminal conduct occurred. In an unpublished opinion, we
rejected the reasoning of Judge Mitchell on this issue. See United
States v. McDermott, No. 93-3603 (5th Cir. June 5, 1995) (vacating
sentence and remanding for resentencing under § 2F1.1(b)(6)).
Application note 15 to § 2F1.1(b)(6) lists four types of
damage flowing from the offense which may be deemed to constitute
-28-
“jeopardizing the safety and soundness of a financial institution,”
only one of which is insolvency.25 From the record, it does not
appear that the district court considered the other three bases for
enhancement under § 2F1.1(b)(6). The district court’s failure to
consider all of the bases for apply § 2F1.1(b)(6) requires us to
vacate the Defendants’ sentences. For example, based on the
record, we find that there is substantial evidence to support a
finding that Defendants’ offense “substantially reduced benefits to
. . . insureds.” Because we conclude that the district court
applied the wrong legal standard, we need not at this point
consider the Government’s argument that the district court was
clearly erroneous in its implicit finding that the Defendants did
not cause the insolvency of Sovereign Insurance. Upon remand, the
district court will have another opportunity to determine whether
Defendants’ fraud scheme caused the insurance company to become
insolvent. Accordingly, we vacate the Defendants’ sentences and
remand to the district court for specific findings on the
application of § 2F1.1(b)(6) under the correct legal standard.
VII
For the foregoing reasons, we AFFIRM the Defendants’
convictions, VACATE their sentences, and REMAND for resentencing
25
Cf. United States v. Bullard, 13 F.3d 154, 158 n.10 (5th Cir. 1994)
(noting that application note 10 to § 2B1.1(b)(7)(A), which is worded identically
to note 15 to § 2F1.1(b)(6)(A), “does not limit the meaning of the terms
‘substantially jeopardizes the safety and soundness of a financial institution’
to the situation where the institution becomes insolvent as a consequence of the
defendant’s conduct”).
-29-
consistent with this opinion.
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