UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

UNITED STATES OF AMERICA )

) No. 02 CR 287-2

vs. )

) Judge James B. Zagel

PAUL M. VAN EYL )

GOVERNMENT'S MOTION IN LIMINE

The United States of America, by Patrick J. Fitzgerald, United States Attorney, requests this

Honorable Court to enter an order in limine barring the defendant from introducing evidence that

the collections operation at First Merchants Acceptance Corporation was ineffective or “broken,”

or from introducing evidence or argument that the alleged ineffectiveness of the company’s

collections operation excused, or constituted a defense to, manipulation of the company’s financial

reporting.

1. Factual Background

The defendant is charged in a twelve-count indictment with fraud by wire, securities

fraud, making false statements in a Form 10-K, bank fraud, and making false statements to financial

institutions. The substance of the charge is that the defendant, along with Mitchell Kahn,

fraudulently manipulated the financial reporting of First Merchants Acceptance Corporation

(FMAC), a publicly held corporation, which was engaged in making automobile loans in the subprime market. The indictment charges, and the evidence at the previous trial established, that the

defendants misrepresented the collections and delinquency experience by the following schemes:

a. Causing delinquent accounts to be made “current” by recording payments

which they knew the customer had not in fact made;

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b. Determining each month, in advance, what level of delinquent accounts

could be charged off, without regard to actual delinquency experience, or the

stated charge-off policies of FMAC;

c. Granting mass “deferrals” to delinquent accounts, in order to carry them as

current on FMAC’s books when they were not current, and to avoid charging

them off, contrary to the publicly stated charge-off policies of FMAC;

d. Carrying “skip” accounts on the books of FMAC as repossessions; and

e. Carrying repossessed vehicles on the books of FMAC at the full value of the

credit account they secured, rather than writing them down as prescribed by

the company’s stated policies.

The effect of these manipulations was to falsely and artificially increase the company’s

apparent earnings and assets, and to understate the company’s delinquency rate, a key indicator of

performance for a company in FMAC’s market. These misstatements enhanced the attractiveness

of the company to both the company’s own lenders and to the investing public, thereby preventing

them from making an assessment of the risks of lending to, or investing in, FMAC on the basis of

accurate information.

At the previous trial, a good deal of time was spent by the defense in trying to show that the

company’s collections process was ineffective, or “broken,” and that this experience was the fault

of an allegedly inept collections manager. The theory of the defense was that FMAC’s loan

portfolio was of better quality than would be surmised from its above-average delinquency rate.

According to the defense, altering the account information brought the company’s financial

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statements to a point where they better reflected what the defense asserts to be the “true” quality of

the loan portfolio.

It is this evidence and argument that should be excluded.

2. Applicable Law

It is well-established in this Circuit that in order to establish a defense of good faith,

a defendant charged with investment fraud must prove that he actually believed the information he

provided to the investors. United States v. Mabrook, 301 F.3d 503, 509 (7th Cir. 2002). It is not

a defense that the defendant honestly believed that he would ultimately be able to perform, and a

belief that his company would eventually be successful “is not relevant because that belief did not

negate the falsity of his representations to his investors.” Ibid.

This principle has been applied repeatedly, both in instructing juries and in excluding

irrelevant evidence and argument at trial. In United States v. Stafford, 136 F.3d 1109, 1112 (7th Cir.

1998), the defendants were prosecuted for soliciting advance fees in exchange for a promise to

procure low-interest loans from impressive-sounding, but fictitious, sources. The district court

excluded defense evidence that, despite admitted misrepresentations to the victims, the defendants

really had intended to procure the multi-million dollar loans they had promised them. The Seventh

Circuit affirmed, stating that the fraud lay in the making of misrepresentations about the defendants’

experience and connections, and extraction of the advance fees by lies. 

Similarly, in United States v. Gole, 158 F.3d 166, 168 (2nd Cir. 1998), the defendant

was charged with having lied about his income, in order to prevent a decline in his pension as a

fireman. The District Court was held properly to have excluded defense evidence that the Pension

Bureau had applied an incorrect formula in calculating the pension reduction, to show that the

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defendant’s misrepresentations had merely prevented an underpayment. To accept this theory of

“self-help,” the Court held, would provide pension beneficiaries “carte blanche simply to lie to

obtain those benefits.” 158 F.3d at 168.

In United States v. Dunn, 961 F.2d 648, 650-1 (7th Cir. 1992), the Court of Appeals

upheld a supplemental jury instruction that “it is no defense that the Defendant believed that [his

company] would eventually succeed.” The Court held that to prove the specific intent element of

mail fraud, the government must prove that the defendant knowingly made a material

misrepresentation or omission. The Court went on to explain, however, that a defendant’s “good

faith belief that [his company] would be successful in the long-term was not relevant to the element

of specific intent because that belief did not negate the falsity of the misrepresentations or his

knowledge that the statements were false when made.”

The District Court in United States v. Harvey, 959 F.2d 1371, 1374-5 (7th Cir. 1992),

had granted the government’s motion in limine to bar evidence that the defendant had tried to

procure funds from sources other than the people he had falsely assured the victims he would easily

obtain money from. The Court of Appeals agreed that such evidence was irrelevant. “If those

statements were false, and [the defendant] did not in good faith believe they were true,” the Court

explained, “his belief that he could procure funds from other sources, and his effort to do so, were

no defense.” 959 F.2d at 1375.

3. Discussion

The above principles have been applied to the specific facts of this very case by

another judge of this Court in Securities and Exchange Commission v. Kahn, et al., 2002 WL

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1163723 (N.D. Ill.) (Nordberg, J.). The Securities and Exchange Commission (SEC) brought suit

against the defendant and co-defendant, Mitchell Kahn, for the precise conduct which underlies the

indictment in this case. In entering partial summary judgment in favor of the SEC, Judge Nordberg

thoroughly discredited the defense Van Eyl relied on in his first criminal trial:

Defendants argue that they were justified because the actual charge

off rate was in fact “inaccurate,” “inflated,” and “misleading”

because FMAC’s loan portfolio was of as good or better quality than

the industry average. This contention defies logic. The level of

charge offs being incurred before Defendants began the various

deferral stratagems was, by definition, accurate because it reflected

the actual number of accounts being charged off. Defendants attempt

to challenge this by focusing on one component of the charge off

equation–the quality of the loan portfolio. However, in doing so,

Defendants disregard the other component, the quality of the

corporation’s collection capabilities, which their own briefs claim is

critical in dealing with subprime borrowers. The level of FMAC’s

charge offs increased because FMAC’s collection system was

“broken” or nonexistent. In altering the account information to

reflect the alleged “true” quality of the loan portfolio, the Defendants

were really concealing the abysmal quality of FMAC’s collection

system. Anyone reviewing FMAC’s financial information would

undoubtedly be interested in the quality of the loan portfolio; they

would also need to know if the collection system, the mechanism by

which gain on the portfolio will be realized, is functioning well or

“broken.” 2003 WL 1163723, *10.

The Court specifically found that a belief that the portfolio was better than it looked could not justify

a defense of good faith:

Defendants actions focused on making the accounts look as

Defendants believed they should look, if all was going well. The fact

remains that all was not going well, as the Defendants concede, and

the accounts were not presented as they actually existed. Thus, even

if Defendants actually believed that they could ultimately fix the

collection system and make the accounts perform as well as they

were (falsely) presented, a defense of good faith is unavailable.

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Since the existence of a problem with FMAC’s collections operation could not legally

justify the defendant in lying to lenders and investors about the company’s past collections results,

whether or not the collections operation was “broken” is irrelevant, and, therefore, inadmissible.

F.R.E. Rules 401, 402. If the defendant and Mitchell Kahn had believed that the problem was

temporary or remediable, they should have reported the company’s experience accurately, and then

explained it in a footnote to the financial statements.

The evidence should also be excluded under Rule 403. When a jury of laymen,

expected to make decisions on matters within the arcane field of public accounting, is repeatedly

exposed to an excuse which is not, as a matter of law, an excuse, the possibility of jury confusion

is very high. Moreover, the experience of the last trial, in which defense counsel was drawn into

wrangles with the former collections manager about the quality of FMAC’s collections effort, shows

the inadvisability of leading the jury into an irresolvable dispute over a collateral matter.

Respectfully submitted,

PATRICK J. FITZGERALD

United States Attorney

By: /s/ Gillum Ferguson 

GILLUM FERGUSON

Assistant U. S. Attorney

219 South Dearborn Street

Chicago, Illinois 60604

(312) 353-1413

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CERTIFICATE OF SERVICE

The undersigned Assistant United States Attorney hereby certifies that the following

document:

GOVERNMENT’S MOTION IN LIMINE

was served on November 17, 2006, in accordance with FED. R. CIV. P. 5, LR5.5, and the General

Order on Electronic Case Filing pursuant to the district court’s Electronic Case Filing (ECF) system

as to ECF filers.

By: /s/ Gillum Ferguson 

Assistant United States Attorney

219 South Dearborn Street

Chicago, Illinois 60604

(312) 353-1413

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