for what il is against the prosecution’s case in chief in deciding whether the basis for this motion
for a new trial — the prosecutor’s alleged improper rebuttal argument — was a significant error.

In gencral, the prosecutor’s argument was effective. He refuted the suggestion that Van
Eyl did not know his conduct was wrong by pointing out that other FMAC employees with
whom Van Eyl regularly dealt knew it was wrong. For example, the prosecutor pointed out that
Steve Zemaitis sought to transfer to another job at FMAC because “he could recognize right from
wrong.” The prosecutor further pointed out that Rich Zielinski, Brian Hake, and Norm Smagley
all could tell that FMAC’s reported delinquency and charge-off rates were fraudulent, Moreover,
he noted that the Audit Committee of the Board ordered an investigation into the delinquency
and charge-off rates because it too thought there was fraud. Finally, he noted that the Board itself
eventually fired Van Eyl because of the fraud. In short, the prosecutor argued that if everyone
else could sce a fraud, then Van Eyl saw it too.

The problem with the evidence elicited by the prosecutors in their case in chief is that not
one of these FMAC employees ever told Van Eyl that the manipulation of the delinquency and
charge-off rates was a fraud. This issue was raised before trial, and | precluded the prosecution

from introducing the opinions of these witnesses that something was very wrong at FMAC. |

that the privilege against self-incrimination was not intended to afford defendants a right to
remain silent or to refuse (o respond to incriminating questions). Moreover, a comparable such
rule no longer cxists in England, which has adopted a rule permitting courts to draw negative
inferences from a defendant’s refusal to testify without good cause. See Criminal Justice and
Public Order Act, 1994, ¢, 33-35 (Eng.). While there may be some justification for the tule when
it involves silence in the course of custodial interrogation by police — even if there were not
Miranda warnings — it is difficult to defend when, as here, the defendant elects not to take the
witness stand when he has heard all the evidence against him, is represented by counsel who can
prepare him to testily and cannot be impeached by prior criminal convictions, Nevertheless it is
the law and is binding upon me.


Yes,

Now, sit, when you testified today you didn’t tell the jury that Paul Van Eyl told
you that these accounting procedures are perfectly acceptable, did you — did you?
I believe I mentioned that he felt that they were acceptable.

You were talking about deferrals there, sir, Here is my question, Did Paul Van Fyl
tell you on this day when you raised your concerns that in his mind these
accounting procedures were perfectly acceptable? Did he tell you that, sit?

A. Yes, he did,

Or OF

There was other cross-examination which established that Gorman did not relate any of his
concerns to other FMAC officers, the general counsel, the outside auditors or the Board of
Directors all of whom were easily accessible to Gorman on one or more occasions, Gorman algo
admitted that he did not possess expertise in secutities law.

The re-direct focused on the fact that Gorman did tell Kahn of the problems. As he
testified, “I told him I felt that the way the company was being run and things he did [referring to
the deferral program), [ didn’t feel comfortable with and wanted to leave the company.”

Re-crass was short:

Q. Let me sec if] got this right. So now it is December, three months — four months
later you go to Mitch Kahn and you say, you know what, everything is improper
around here, right?

No, I just resigned because I didn’t fee) comfortable being with that company.
So then he says, why don’t you take this demotion and go down to Nashville?
He asked me to stay. He said, Peter, give mc some time to get this thing fixed up
and would you please go down to Nashville, and I said, yes, Mitch, I will.

And you said, okay, great, thanks?
I did. I said, yeah, T will.

>O POP

Most of Gorman’s testimony is phrased in terms of being “uncomfortable” with what was
happening. This feeling could encompass everything {rom criminal misconduct to management

style to choice of office furniture and all the policy and practices in between. It is simply not



Pollard, 959 B.2d 1011, 1037 (D.C. Cir. 1992) (equating moral opinions with legal opinions);
Washington v. United States, 390 F.2d 444, 455 n. 31 (D.C. Cir, 1967) (same).

The prosecutor should not have made this argument. It was powerful and persuasive, and
it is impossible for me to conclude that it, standing alone, did not affect the verdict. But perhaps
it did not stand alone. Peter Gorman did testify that he (hought the practices were illegal and that
he confronted Van Ey! with his opinions. This evidence showed that someone, who was subject
to cross-examination, did tell Van Fyl that the practices were illegal. If this evidence is strong
enough, then it may be that the argument about what Ziclinski and others thought is not all that
significant and indeed harmless error.

Peter Gorman was, at Icast at the time he testified, a very experienced manager of
collections. At FMAC he was vice-president of collections and reported to Kahn, He thoroughly
understood FMAC’s policy governing charge-off of loans, In fact, he wrote the policy on
deferments which included the requirement of a signed deferral agreement. Gorman oversaw
collections but he did not oversee charge-offs nor did he have the power to charge off or defer an
account. Van Eyl oversaw that.

In early September, Gorman was present at a meeting to discuss a new deferment
program which Van Eyl presented. Immediately after the conference, he went to Van Eyl’s
office. At trial, he testified as to what happened there:

Q What did you say to him?

A. T told Paul I felt uncomfortable. | felt it was, you know, didn’t make sense to me.
didn’t feel comfortable with it. You know, Paul responded that it was a common
practice within the industry.

Did you respond?

Yes. [ felt that that was not truc. I said, Paul, I said, 1 don’t believe that is true. 1
think we are updating accounts and this is definitely wrong, and I think that

ed


limited the use of their opinions only to those situations in which the opinions were essential to
explain the actions taken by the witnesses and for only that limited purpose.

When the prosecutor violated that in limine ruling during closing argument, J overruled
the objection, While the objection was not as full as it should have been, not as sufficient as it
could have becn, and perhaps deficient in giving me all the information I needed, 1 am reluctant
to find waiver because I did understand the objection to refer to the form of argument that was
being made. J overruled it, I recall, because [ thought the door had been opened by the defense
argument and, more importantly, because I thought the focus of the argument would be on the
testimony of Peter Gorman.

After further consideration, however, I think the door had not been opened. Substantially,
the focus of’ the defense argument was not that others thought everything was all right; rather the
focus was that Van Eyl was not fold if was wrong. The prosecution was not forced to make the
argument it did in rebuttal. There was ample evidence that no single person other than Van Eyl,
Kahn and perhaps Thomas Ehmann (the CFO) knew all the details of the different ways in which
the numbers were being manipulated. Procedurally, the prosecution did not scek a ruling from me
that the defense argument had waived its right to rely on the in limine ruling.

The truth is that the witnesses believed the accounting was wrong, or contrary to FMAC
policy. The prosecution notes this very point — that these witnesses usually used words like
“right,” “wrong,” “true,” “false,” and “fraud.” It argues that these witnesses were not offering
legal opinions. This is not a bad theory. It mutes the force of Van Eyl’s argument that he was
prejudiced with opinions not admitted under Rule 701. But my ruling was to exclude the moral

as well as the legal opinions of the witnesses, which is acceptable to do. See United States v.


oP

POoPOP

KE

Ore

Op Or Or OF

No, the question is, the report docsn’t reflect your saying that, correct?

Correct.

Now, | was taking down notes — during this conversation [heard you on direct say
that Paul Van Eyl said two things to you. One, deferrals are common practice in
the industry, is that your testimony?

Yes,

And, two, you claim he said “I wasn’t a team player,” right?

Yes.

Go back to that FBI 302 report. Go back to that report of your interview, sit,
Okay.

You never told the FBI, in November of ‘97, that Paul Van Eyl said, “You are not
a team player,” right?

To be honest with you, I can’t remember whether I did or didn’t.

Okay, but you said you have reviewed this report and it is an accurate summation,
correct?

I believe it is an accurate summation.

And, according to the report, you didn’t say that, did you?

If it docsn’t show in there.

Mr, Gorman, would you tum to page four?

Yes.

In that paragraph, sir, did you, according to this report, did you tell the FBI that
after the mecting adjourned Gorman told Van Ey] that he was uncomfortable with
the program. Gorman told Van Ey! that this program was clearly a violation of
securities laws and that the Securities and Exchange Commission may someday
investigate this matter, correct?

Yes.

And Gorman specifically told Van Eyl that in Gorman’s opinion someone is going
to go to jail for this, right?

Yes.

Now, did you then also tel) the FBI that Gorman remembered that Van Eyl turned
pale upon this accusation?

Yes.

And, sir, did you tell the FBI that he said — he told Gorman that these accounting
procedures are perfectly acceptable — isn’t that what you told the FBI he said?
Yes,

And then you responded ~ you responded, that’s bullshit and you know it. That is
what you said in November, right?


———————

Minute Qsster Form (1697)

United States District Court, Northern District of Hlinois

Name of Assigned Jud;
or Muglstrate Judge

James B. Zagel Sitting Judge if Other
than Assigned Judge

CASE NUMBER 02 CR 287 DATE 7/13/2004
CASE UNITED STATES vs. PAUL VAN EYL
TITLE iL

{In the following hox (a) indicate the party filing the mation, ¢.g.,.plaintif{, defendant, 3rd party plainliff, and (b) state briefly the nature

MoTION: of the motion being presented. ]

DOCKET ENTRY:

(1) a Filed motion of ( use listing in “Motion” box above.]

(2) i) Brief in support of motion due ___.

(3) 0 Answer brief to motion due _- Reply to answer brief duc_____.

(4) a Ruling/Hearingon set for at.

(5) a Status heating(held/continued to] (set for/re-set for] on __—_sset for at

(6) Oo Pretrial conference[held/continued to} [set for/re-set for]on__—_esetfor at.

(7) a ‘Trial|set for/re-set forjon_ al

(8) o (Bench/Iury trial] [Hearing] held/contimed to at__

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreemenvpursuant ta]

COFRCP4(m) = CLocal Rule 41.1 OPREPALa)(1) CIFRCP41(a)(2).

qo {Other docket enty] Enter memorandum opinion and order denying request for judgment of
acquittal, but granting, in the alternative, a new trial.

al) [Por further detail see order attached to the original minute order.|

No notices required, advised in open courl , .,Document:

Number

No notices required

Notices muiled by judge’s staff.

Notified counsc} hy telephone.

AS | Docketing to mail notices.

Mail AO) 450) form,
}—| ¥N29 LIWISta “sip
Brae)

Copy tn judge/magistrate judge:

ate mailed notice,

wo

courtroom
Dw deputy’s
initials

PeS tld St tne 4002
= (bay if recnived in

enulal Clerk's Office mang deputy ints



For the reasons above, Van Eyl’s Motion for Judgment of Acquittal is DENIED, but his
Motion for New Trial is GRANTED.

ENTER:

~ (3 Saf
Jameg B. Zagel wa
Unitgd States District Judge

pate: JUL 18 2004

the argument he did and mistaken to believe that the defense had opened the door to an otherwise
prohibited argument. These arc honest mistakes made in good faith by a lawyer who has in his
appearances before me demonstrated a high standard of professional ethics and a sense of
fairness toward opposing partics.

iB



clear what Gorman meant. That he thought the company was badly run on a number of fronts is
clear from his testimony, and it is clear that he was right.

One could reasonably interpret Gorman’s statement as a clear warning that the deferral
policy was criminal, But one could just as reasonably interpret it in other ways. He did not resign
from an enterprise which he thought was criminal until months later and then was easily talked
out of it by a man whom he believed to be in on the misconduct. This allows an inference that he
thought it was mismanagement and not crime that was at hand. Moreover, he was in profound
disagrcement with Van Eyl’s program which was in violation of the policy he had authored. In
corporate turf battles, it is not uncommon to allege that your opponent’s program would be
illegal. The accusation has more force than simply saying something is foolish, short-sighted or
bad business — much like legislators who say a bill is “unconstitutional” as a substitute for simply
saying that they don’t agree with the proposal. Finally, Gorman never used words like “Securitics
and Exchange Commission” or “jail” again, perhaps because, as a non-cxpert, he was not so sure
of his ground in the face of Van Eyl’s assertion that the practice was legitimate.

One could legitimately argue that there is not a serap of evidence that Van Fyl ever, after
his conversation with Gorman, brought the issues to the attention of the gencral counsel, the
outside auditors, the board of directors ot any other person not involved in the decision to go
ahead with the practice. This is a fair comment on the evidence and not a comment on the
defendant's silence. It is a decent argument but, even if voiced, it does not overwhelm the
defense or cancel out the improper prejudice that arose from the earlier argument that violated

my ruling in limine. Therefore, | grant the motion for a new trial?

5 My ruling should not be interpreted as a judgment that the prosecutor violated any
reasonable standards of professional ethics. The prosecutor was mistaken about his right to make

10


somebody is going to have some issues at the Securities and Exchange
Commission, is going to have issues with this and in my mind somebody is going
to go to jail for this.

Qa. You said those things to Paul Van Eyl?
A Yes, I did,

Q. What did he do?

A.

He looked at me and, { belicve, mentioned that I wasn’t a team player and then left
his office and walked down the hall to Mitch Kahn’s office and they closed the
door.

Standing alone, this is quite damning testimony on the question of Van Eyl’s conduct with
respect to the deferment program. The fact that Van Eyl ended the confrontation by walking out
of his office to see Kahn matters as well since Kahn testified that he and Van By) were co-
conspirators in the fraud.

Gorman did not resign, however. He did not work on nor did he hear of the mass of
deferrals that were made in the last months of 1996. He continued to work in collections along
with another man who, in October, was assigned to “split” Gorman’s job with Gorman, In
December, Gorman resigned in a meeting with Kahn, but Kahn persuaded him to stay on and go
to Nashville, Tennessee where FMAC had a collections center, Gorman was there until mid-
March when he retumed to corporate offices. On April 1, he was Ict go and told his job had been
eliminated.

Gorman was impeached by omissions from the FBI report of his interview, which

Gorman conceded was an accurate report. The cross-examination went this way:

Q. {s that an accurate summarization of what you told the FBI in November of 1997,
as best you can recall?

A, Yes, I believe it was.

Q. And nowhere in that report does it say that you told the FBI that in November of
“97 that Paul Van Eyl went down to Mitch Kahn’s office alter that meeting,
correct?

A. T can’t remember. | mean —


supervision of Van Ey} invoked practices which produced misleading numbers and then gave
these numbers to various unsuspecting employees and outside professionals who used them to
comply with the company’s various obligations to report to banks, the SEC and others.

Therefore, | deny the motion for judgment of acquittal.

Motion for New Trial

The vexing problem of this case is the motion for a new trial. [ have taken an
exceptionally long period of time to deal with this matter, partly because, until recently, {had
some small expectation that a plea agreement could be reached, partly because [ necded to
examine portions of the trial transcript, the preparation of which was delayed, and partly because
the question of a new trial is a close one.

Van Ey! never disputed the facts about what was done at FMAC. His defense was that he
was “a 28 year old kid” without legal or accounting training who followed the lead of Kahn, a
lawyer, and that financial officers in the company and outside auditors went along with the
accounting. Van Eyl’s defense was, in short, that his intent to defraud had not been proven. The
defense was not “believe me, | did not know”; it was “the prosecution did not prove I knew.” He
presented no affirmative evidence that he lacked intent or knowledge that the accounting
practices were fraudulent, and he never testificd or offered any affirmative evidence that he had
no intent to defraud, Although the fact that he did not testify cannot result in any inference of

guilt, Griffin v. California, 380 U.S. 609 (1965), Van Eyl’s method of defense has to be weighed

? The rule has been somewhat criticized. See, ¢.g., Albert Alschuler, A Peculiar Privilege
in Historical Perspective: The Right to Remain Silent, 94 Mich. L. Rev, 2625, 2667-72 (1996)
(reviewing objections to affording suspects and defendants a broad right to silence and arguing

3


accounting and FMAC’s own procedures required. When a borrower disappeared and could not
be found, the loan was not written off completely as it should have been, but was discounted by
only 45% of its value. The accounts of those who were delinquent but whose property had not
been repossessed and who had not “skipped” into the land of unfound, should also have been
discounted but were not. The technique here was to give deferments to such borrowers.
Deferments are legitimate devices used by lenders who believe that a borrower has fallen behind
in payments because of some temporary hardship. To give the borrower a chance to set things
right, the borrower is offered a deferment, Usually a deferment is given only after obtaining the
signed deferral from the borrower who pays a deferment fee. FMAC policy (which, I infer, was
common in the business) was that deferments were not offered to persons who were more than
one or two payments behind. Contrary to this policy, however, deferments at FMAC were given
to many who did not sign agreements (and may not have even been informed of them) and who
were too delinquent to qualify for them. The end result of granting these deferrals was that
delinquent accounts were converted into current accounts. None of these things should have been
done although many of them were remedied before SEC reporting periods and the deferrals were
disclosed.

Although Van Eyl really had little 10 do with the required bank and government filings at
issue here,’ a reasonable jury could find that he knowingly participated with Kahn in a scheme to
cook the books of FMAC to keep the stock price of FMAC shares high. Van Eyl was a high-
ranking employee of FMAC, in essence Kahn’s right hand man. A jury could find beyond a

reasonable doubt that a small number of FMAC employees under the leadership of Kahn and the

' T suspect that this is why the jury hung on some of the counts.

2


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

UNITED STATES OF AMERICA,
v. No. 02 CR 287

Judge James B. Zagel
PAUL VAN EYL.

MEMORANDUM OPINION AND ORDER
This fraud trial began with twelve counts, all but two of which ended in a hung jury.
Defendant Paul Van Fyl was convicted of wire fraud and false statements to the SEC. The
mistried counts included substantive counts of securities fraud, bank fraud and false statements to
a financial institution. Van Eyl now moves for a judgment of acquittal, and, alternatjyvely, for a

0
JU “Here Hi

ig
t 2009

new trial.

Motion for Judgment of Acquittal

That there was a criminal fraud is not in dispute. A company called Pirst Merchants
Acceptance Company (“FMAC”) conducted business in the subprime loan market. FMAC was
publicly listed. It had a loan portfolio on which it collected payments. A good deal of its business
performance was judged on its ability to collect on the loans, ‘the President of FMAC, Mitchell
Kahn, a co-defendant in this case plead guilty and testified to various ways the company used to
make its books look better than they should have. The idea was to manipulate the delinquency
and charge-off rates on its loan portfolio during a certain period of time. Fewer delinquencies and
fewer writing off of loans make a loan portfolio look better.

No single technique was used. Where an auto loan had failed and the vehicle was

tepossessed, the ]oan was kept on the books at its full value instead of the lesser value that proper