USCA1 Opinion
UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT
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No. 95-1143
UNITED STATES OF AMERICA,
Appellee,
v.
C. WILLIAM WESTER,
Defendant, Appellant.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
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Before
Selya, Cyr and Boudin,
Circuit Judges.
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Rhea P. Grossman, P.A. for appellant.
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Ellen R. Meltzer, Special Counsel, Fraud Section, Criminal
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Division, Department of Justice, with whom Donald K. Stern, United
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States Attorney, and Pamela Merchant, New England Bank Fraud Task
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Force, were on brief for the United States.
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July 22, 1996
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BOUDIN, Circuit Judge. Clary William Wester was
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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
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States v. Dodd, 43 F.3d 759, 760-61 (1st Cir. 1995).
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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
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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
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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
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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
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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
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al., Modern Federal Jury Instructions 24.01 (1995). And,
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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.
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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
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specifically requested by Wester. The language--which Wester
believes to have been required by our decision in Gens--
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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.
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Wester's position is far from absurd, cf. United States
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v. Dochtery, 468 F.2d 989 (2d Cir. 1972), but in the end it
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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
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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
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(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.
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2The government's brief conveys the impression that, as
to all of the loans there was a failure to obtain required
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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
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Gens, a director of the bank, had persuaded others (e.g., one
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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
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broad notion that "willful misapplication occurs whenever
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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
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as to that borrower was remanded for a new trial under new
instructions.
Gens held that the government's "whenever" theory was
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overbroad but Gens did not bar a misapplication charge in
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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
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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
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involved dishonesty (e.g., false entries in the bank's
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records). Id. at 923-24.
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Wester's requested instruction 37 was thus not warranted
by Gens because it would have converted a circumstance in
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Gens--financial responsibility of the borrower--into an
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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
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v. United States, 328 U.S. 640 (1946), that a conspirator may
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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
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instruction was mistaken in two respects.
First, Wester argues that the Pinkerton instruction
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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
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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
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evidence of various substantive offenses . . . it raises the
risk that the jury will resort to the inverse of Pinkerton
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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
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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
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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
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loan documents by Fredo), a Pinkerton instruction was
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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
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bribery is eight, id. 2B4.1, to be increased based on the
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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
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v. Fitzhugh, 78 F.3d 1326, 1331 (8th Cir. 1996).
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In Fitzhugh, the court was concerned with valuing the
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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.
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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
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F.2d 580, 585 (4th Cir. 1991), cert. denied, 112 S. Ct. 3030
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(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
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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
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(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.
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at 736, we think that this is a proper case for us to notice
a significant mistake. United States v. Whiting, 28 F.3d
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1296, 1312 (1st Cir.), cert. denied, 115 S. Ct. 378 (1994).
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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
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States v. Graciani, 61 F.3d 70, 75 (1st Cir. 1995), and that
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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.
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June 18, 1996).
None of this would matter if the undisputed facts
required a finding that there were five criminally
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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,
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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
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the convictions but vacate the existing sentence and remand
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for resentencing.
It is so ordered.
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