* Pursuant to Local Rule 47.5, the court has determined that

this opinion should not be published and is not precedent except

under the limited circumstances set forth in Local Rule 47.5.4.

1

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 95-21072

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

VERSUS

JERALD J. HENDRICKS; WILLIAM P. VERKIN, MICHAEL J. FRYE,

Defendants-Appellants.

Appeal from the United States District Court

For the Southern District of Texas

(CR-H-94-141)

May 15, 1997

Before GARWOOD, DeMOSS and PARKER, Circuit Judges.

PER CURIAM:*

William P. Verkin (“Verkin”), Jerald J. Hendricks

(“Hendricks”) and Michael J. Frye (“Fyre”) appeal their convictions

for conspiracy to commit bank fraud in violation of 18 U.S.C. § 371
1The record contains conflicting evidence about the exact amount

of some relevant figures. These discrepancies do not impact the

issues before this court. We therefore make no attempt to resolve

the discrepancies and use approximate figures in the recitation of

facts.

2

and bank fraud in violation of 18 U.S.C. § 1344. For the following

reasons, we reverse.

PROCEEDINGS AND DISPOSITION BELOW

Verkin, Hendricks, Frye and Joseph Russo (“Russo”) were

charged in a two count indictment with bank fraud and conspiracy to

commit bank fraud. Russo pleaded guilty and testified against the

others. During trial, the district court granted a motion for

judgment of acquittal as to the first paragraph of Count One which

charged the defendants with conspiring to defraud the United

States, but denied a motion for acquittal on the remaining

paragraph which charged conspiracy to defraud a credit union. The

jury found Verkin, Hendricks and Frye guilty of both conspiracy and

bank fraud.

Verkin was sentenced to two consecutive two-year terms of

confinement. Frye and Hendricks were each sentenced to two

consecutive three-year terms of confinement.

FACTS1

This case involves two interrelated transactions; the

defendants’ purchase of 500 acres on I-45 in League City, Texas and

of a Coors Beer distributorship in San Antonio, Texas from

Burkett’s Distributing Company.
3

In November 1986, Verkin, a licensed real estate agent,

executed earnest money contracts for the League City acreage as

trustee for an undisclosed principal. The purchase price was $8.9

million, with a down payment of $1.5 million, and the remainder to

be financed by the owners, a group of related entities referred to

as the Campbell Estate. The land was valued at $32 million by

contemporaneous appraisals. Verkin later negotiated for 41 of the

500 acres of the land to be transferred free and clear.

In the summer of 1986, Pat Gooden, a business broker, alerted

Frye and Hendricks to the availability of the beer distributorship.

The distributorship was in default on $6 million in loans from the

Government Employee’s Credit Union (“GECU”) and had other

indebtedness of $4 million. Frye and Hendricks decided to buy the

distributorship and proposed refinancing the distributorship debt

through GECU and reallocating a portion of that debt to the League

City acreage. On February 5, 1987, GECU approved a $9,649,000 loan

for “down payment and contingency residual principal and interest

in connection with a work out loan for acquisition of Burkett’s

Distributing and acquisition of land in [League City], Texas.” 

In February 1987 Verkin attempted to negotiate an agreement

with some members of the Campbell Estate whereby they would retain

an interest in the joint venture. That proposal was never

consummated. Instead, on February 24, 1987, Verkin entered a joint

venture agreement with George Beach III (“Beach”), his second

cousin and employee. The agreement required Beach “upon the
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request of Verkin [to] cause legal title to the Venture Property to

be conveyed to the Joint Venture.” The agreement gave Verkin an

option to purchase Beach’s interest in the venture and in the

League City property for $2.2 million. Hendricks, Frye, Verkin and

Russo entered into a second joint venture agreement, which noted

that Beach had conveyed his interest in the real estate to them.

At closing, Beach received $2.2 million, which he endorsed

back to the defendants’ joint venture, in return for a $5000

payment. Hendricks, Frye, Verkin and Russo then applied the loan

proceeds to the purchase price of the beer distributorship, the

real estate, the various expenses connected with the transactions

and a payment of $226,826 to each of the four defendants. The

$226,826 payments are the focus of this prosecution.

ADMISSIBILITY OF CO-DEFENDANT’S WRITTEN PROFFER

The district court admitted a written proffer of evidence

attached to Russo’s plea agreement. We review challenged

evidentiary rulings for abuse of discretion. United States v.

Buchanan, 70 F.3d 818, 832 (5th Cir. 1995), cert. denied, 116 S.

Ct. 1340 (1996).

During redirect examination of Russo, the government offered

its plea agreement with Russo into evidence, contending it was

admissible as a prior consistent statement. The defendants did not

object to the admission of the plea agreement, but did object to

the proffer, on the grounds that it was hearsay and inadmissable as
2Tome was decided on January 10, 1995. This case was tried in

August 1995. 

5

a prior consistent statement because there had been no allegation

of recent fabrication. The government responded that under

801(d)(1)(B) it was proper to introduce prior statements that Russo

had adopted to rebut the implied charge of improper influence or

motive. The district court allowed the document into evidence and

permitted Russo to read portions of it to the jury.

Rule 801(d)(1)(B) provides:

A statement is not hearsay if -

(1) Prior statement by witness -- The declarant

testifies at the trial or hearing and is

subject to cross-examination concerning the

statement, and the statement is. . .

(B) consistent with the defendant’s testimony

and is offered to rebut an express or implied

charge against the declarant or recent

fabrication or improper motive.

FED. R. EVID. 801(d)(1)(B). In Tome v. United States, 513 U.S. 150,

115 S. Ct. 696, 130 L. Ed. 2d 574 (1995)2, the Supreme Court held:

[Rule 801(d)(1)(B)] permits the introduction of a

declarant’s consistent out-of-court statements to rebut

a charge of recent fabrication or improper motive only

when those statements were made before the recent

fabrication or improper influence or motive.

513 U.S. at 155, 115 S.Ct. at 705. Because the proffer was written

after the improper influence or motive arose, it was clearly not

admissible under Rule 801(d)(1)(B) as interpreted by Tome.

Admitting the proffer was thus error. United States v. Riddle, 103

F.3d 423, 432 (5th Cir. 1997).
6

The government concedes that the admission of the proffer

violates the holding of Tome, but argues that the error was

harmless. 

ADMISSIBILITY OF DEFENDANTS’ DEPOSITION TESTIMONY

The district court admitted portions of deposition testimony

given by Frye and Verkin in a related bankruptcy proceeding as well

as Frye’s answers to interrogatories pursuant to Rule 801(d)(2)(E),

as statements of co-conspirators. The defendants objected, citing

Bruton v. United States, 391 U.S. 123, 88 S. Ct. 1620, 20 L. Ed. 2d

476 (1968) and arguing that the statements were not made in

furtherance of the conspiracy. The district court found that the

statements were made in the furtherance of the conspiracy,

overruled the objections and denied defendants’ requests for

severance and limiting instructions.

We review the admission of co-conspirator statements under

Rule 801(d)(2)(E) for abuse of discretion. United States v. Krout,

66 F.3d 1420 (5th Cir. 1995), cert. denied, 116 S. Ct. 963 (1996).

The district court’s findings of fact relating to the admission are

reviewed for clear error. United States v. Stephens, 964 F.2d 424,

434 (5th Cir. 1992).

A statement by a co-conspirator is not admissible if the

person making the statement does not testify at trial. United

States v. Restrepo, 994 F.2d 173, 186 (5th Cir. 1993). The

government must prove, and the trial court must find, by a
7

preponderance of the evidence that the statements were made in the

furtherance of the conspiracy to be admissible under Rule

801(d)(2)(E). Bourjaily v. United States, 483 U.S. 171, 107 S. Ct.

2775, 97 L. Ed. 2d 144 (1987). A statement made after the

conclusion of the conspiracy is not admissible under Rule

801(d)(2)(E). See United States v. Esacove, 943 F.2d 3, 4 (5th

Cir. 1991).

The government took the position at trial that the answers to

interrogatories and deposition testimony were designed to conceal

the conspiracy and to prevent its discovery. In Grunewald v.

United States, 353 U.S. 391, 401-02, 77 S. Ct. 963, 1 L. Ed. 2d 931

(1957) the Supreme Court distinguished acts of concealment done in

furtherance of the main criminal objectives of the conspiracy from

acts of concealment done after these central objectives have been

attained for the sole purpose of covering up after the crime. 353

U.S. at 405. In this case, the main objective of the alleged

conspiracy -- obtaining the excess loan proceeds -- was attained in

March 1987, when the loan was funded. The statements in question

were made by the defendants years after the receipt of the

proceeds. 

The prosecution included in the indictment as an additional

objective of the conspiracy “to prevent the detection of their

receipt of the money.” The government argued in the district court

that because of this allegation, the co-conspirator statements
8

qualified as “made in furtherance of the conspiracy.” The

government’s brief on appeal does not mention this theory of

admissibility. Instead, they argue that the depositions and

interrogatories were properly admissible under Rule 801(d)(2)(D) as

“a statement of the party’s agent or servant concerning a matter

within the scope of the agency or employment, made during the

existence of the relationship, citing United States v. Saks, 964

F.2d 1514, 1523-26 (5th Cir. 1992). 

We reject the district court’s implicit finding that the

statements were made “in furtherance” of the conspiracy as contrary

to the Supreme Court’s mandate in Grunewald. Further, the record

does not reflect the factual predicate necessary for 801(d)(2)(D)

admissibility. We therefore find that the district court erred in

admitting the defendants’ deposition testimony and answers to

interrogatories. 

HARMLESSNESS

We must next determine whether these errors, either standing

alone or cumulatively, were so harmful that they mandate reversal.

The Russo proffer, authored by the prosecutor, is particularly

troublesome for two reasons. First, it was the government’s

version of the case, capsulized in written form, available to the

jury during deliberations. Second, the proffer was much more

favorable to the government’s theory of the case than the actual

testimony by Russo at trial because it contained statements about
9

the defendants’ state of mind, GECU “knowledge” and what GECU would

have done had it known the true facts, none of which was included

in Russo’s trial testimony.

The defendants’ statements, made years after the alleged

crime, as part of a bankruptcy proceeding are likewise harmful,

imputing to the defendants an intent to conceal their activities

surrounding the transactions in question. 

The cumulative effect of these two errors, in light of the

fact that the remaining evidence in this case raised real

sufficiency concerns, requires reversal for new trial. See United

States v. Riddle, 103 F.3d 423, 434 (5th Cir. 1997). 

SUFFICIENCY OF THE EVIDENCE

Hendricks, Frye and Verkin each challenge the sufficiency of

the evidence to sustain their convictions. Viewing the evidence

and the inferences that may be drawn from it in the light most

favorable to the verdict, this court must determine whether a

rational jury could have found the essential elements of the

offenses beyond a reasonable doubt. United States v. Aubin, 87

F.3d 141, 144 (5th Cir. 1996), cert. denied, 117 S. Ct. 965 (1997).

To establish a conspiracy under 18 U.S.C. § 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.
3The Supreme Court recently held that materiality of the

falsehood is not an element of the crime of making a false

statement to a federally insured bank under 18 U.S.C. § 1014, after

concluding that the term “false statement” contained in that

statute incorporated no common law meaning requiring materiality.

United States v. Wells, ___U.S.___, 117 S. Ct. 921, 927-29, 137 L.

Ed. 2d 107 (1997). The statute at issue here proscribes “fraud.”

The term “fraud” has traditionally encompassed the requirement of

a material misrepresentation or omission in order to be actionable.

See BMW of North America v. Gore, ___U.S.___, 116 S. Ct. 1589,

1600-1601, 134 L. Ed. 2d 809 (1996). We therefore conclude that

Wells does not abrogate the Fifth Circuit rule, articulated in

Campbell, requiring the government to prove materiality in a bank

fraud case. See United States v. Cochran, 1997 WL 13790, *7 n.3

(10th Cir., March 25, 1997). 

10

United States v. Pettigrew, 77 F.3d 1500, 1519 (5th Cir. 1996).

The agreement to join the conspiracy need not be express, but may

be inferred from circumstantial evidence. Id. To sustain a bank

fraud conviction under 18 U.S.C. § 1344, the government must prove

that the defendant knowingly executed or attempted to execute a

scheme or artifice (1) to defraud a financial institution; or (2)

to obtain any property owned by, or under the custody or control

of, a financial institution by means of false or fraudulent

pretenses, representations or promises. A “scheme to defraud”

includes the use of fraudulent pretenses or representations

intended to deceive to obtain something of value from a financial

institution. The defendant must make a material misrepresentation

to the bank, that is, one having “the natural tendency to influence

or was capable of influencing the decision of the lending

institution.” United States v. Campbell, 64 F.3d 967, 975 (5th

1995).3 It is clear and undisputed that neither borrowing excess
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money nor using a trustee (or “strawman,” as the government

referred to Beach) are crimes. Rather, the government contends

that the convictions are based on affirmative concealment intended

to defraud -- that is concealment of the fact that the defendants

received proceeds beyond what was necessary to purchase the assets.

The defendants contend that this is a legitimate but complex

business deal that GECU entered into because it benefitted

financially; the transaction bailed GECU out of a disastrous

preexisting loan on the beer distributorship. They contend that

GECU got exactly what it bargained for in terms of both collateral

and risk, and that distribution of the loan proceeds, as well as

Beach’s role, were revealed in the closing papers. Further, Verkin

contends that he was entitled to, but did not receive, a real

estate commission on the deal that was greater than the amount he

received as his share of the proceeds, making it unlikely that he

intentionally committed fraud to get less than he had earned on

commission. 

The government relies primarily on the testimony of former

GECU employee Carol Cambern that she did not know that the loan

included excess proceeds and if she had known, she would not have

voted to approve the loan. The government argues that Cambern’s

testimony was “circumstantially corroborated” by the fact that the

credit union required a $300,000 certificate of deposit before

making the loan. They reason that requiring such security is

inconsistent with including excess loan proceeds in the deal.
12

Defendants answer that neither GECU’s loan officer assigned to this

account, GECU’s president, nor its lawyers who drafted and reviewed

the loan documents testified. The jury heard no testimony

concerning what these individuals knew at the time the loan was

made. Further, they argue that the request for additional security

is totally consistent with the additional risk involved in loaning

excess proceeds.

There were two events referred to at trial as closings. The

first was a meeting on March 26, 1987 at the law offices of

Fulbright and Jaworski, who served as GECU’s attorneys. After

extended negotiations and redraftings, the parties concluded the

agreement for the purchase of the brewery. The next day, the

buyers and sellers attended a real estate closing at Texas American

Title Company where the title to the real estate was transferred.

No GECU employee, attorney or representative attended the second

closing, although they were clearly entitled to be present.

Nothing in the record explains their absence. From the first loan

commitment, GECU reserved the right to have their lawyers draft or

review every document necessary to close the deal. The details of

the transaction changed many times between the initial proposal and

final closing, which is typical for a complex, multi-party, multimillion dollar business deal. It is clear that the documents

available at the real estate closing revealed all the relevant

information, including who held title to the land, how the loan

proceeds were being distributed, and Beach’s true role in the
13

transaction. 

The government introduced into evidence an early proposal from

the defendants to GECU that includes a $2.2 million dollar item

designated as the amount necessary to buy out prior partners. They

asked the jury to infer that “prior partners” refers to Beach, who

at that time was not a partner, and who, even when he became a

partner in the joint venture, did not hold a $2.2 million dollar

interest. However, at the time the document was drafted, the

defendants were in negotiations with persons associated with the

Campbell Estate whom they asked to join their joint venture. The

agreement with Beach was not reached until later. In sum, the

“prior partner” item was not a misrepresentation when drafted, and

the myriad changes between that early proposal and the final deal,

which eventually included Beach as a joint venturer, were revealed

in the subsequent paperwork and the closing documents. GECU’s

failure to review the documents or send a representative to the

closing does not make an otherwise legitimate, but complex,

business transaction a crime. However, the government asked the

jury to infer that the defendants structured the deal in this way

in an effort to conceal Beach’s true role in the transaction.

The record does reveal that defendants made one

misrepresentation during the negotiations, which the government

emphasized at trial. The original proposal included approximately

500 acres of real estate, appraised at $32 million. Later, 41

acres were carved out of that parcel and transferred to the
14

defendants free and clear. There is evidence that the defendants

lied to GECU about the reason for this change -- claiming that the

41 acre change resulted from “survey problems” which did not exist.

A rational juror could certainly conclude that this was a

misrepresentation, but it was simply not material to GECU’s

decision to loan the money. The appraised value of the remaining

property was accurately revealed and well in excess of the amount

GECU determined was necessary to secure that portion of the loan.

These facts present a very close question. However, we are

unable to say that no reasonable juror could have found all of the

elements of the charged crimes beyond a reasonable doubt. In the

event that the government elects to retry the defendants, the jury,

after considering the admissible evidence without the taint of

error, must make that determination.

CONCLUSION

For the foregoing reasons, we reverse the defendants’

convictions and remand for further proceedings.

REVERSED AND REMANDED.