REVISED, July 29, 1998

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________

No. 96-20908

____________

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

versus

KENNETH LEE SCHNITZER, SR.,

PHILIP J. BARBER, and

WALTER M. ROSS,

Defendants-Appellees.

______________________________

Appeals from the United States District Court

for the Southern District of Texas

______________________________

July 2, 1998

Before REAVLEY, JONES, and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

On July 20, 1995, a federal grand jury returned a four-count indictment against Kenneth Lee

Schnitzer, Sr., Philip J. Barber, and Walter M. Ross. These three defendants were directors of the

BancPLUS Savings Association, a federally insured financial institution operating in T exas. The

charges in the indictment stemmed from a two-part real estate transaction negotiated and approved,

in large part, by the defendants, whereby California-Texas Properties, Inc. (Cal-Tex), agreed to buy

land owned by BancPLUS in e xchange for BancPLUS’s agreement to purchase land from Scott’s

Cattle Company (Scott’s Cattle).

At trial, the government advanced several theories for why the events surrounding this

transaction an d its accounting subjected the defendants to criminal liability. Convinced by the

government’s myriad atta cks on the propriety of the conditional sales, the jury convicted the

defendants of misapplying BancPLUS funds, making a false entry in BancPLUS records, devising or2

attempting to devise a scheme and artifice to defraud BancPLUS, and conspiring to commit at least

one of these three substantive offenses.

The district court, however, directed a judg ment of acquittal for each defendant on each

count, and in the alternative, granted each defendant’ s request for a new trial on all counts. On

appeal, the government challenges both of these decisions by the district court. With respect to the

false entry count, w e ho ld that the government produced sufficient evidence in support of its

permissible theory of false entry but also placed evidence of a legally impermissible theory of false

entry before the jury. We therefore reverse the district court’s decision to acquit the defendants on

the false entry count, but affirm its decision to grant the defendants a new trial on this count and the

related conspiracy charge. For the reasons discussed below, we affirm the district court’s decision

to acquit each defendant on the misapplication of funds and bank fraud counts. The defendants are

also entitled to acquittals on the conspiracy charges related to these two substantive offenses.

I. Factual Background

In order for the defendants to be acquitted on the basis of insufficient evidence, the evidence

viewed in the light most favorable to the verdict must demonstrate that a rational trier of fact could

not have found the essential elements of the alleged crimes beyond a reasonable doubt. S ee United

States v. Beuttenmuller

, 29 F.3d 973, 978 (5th Cir. 1994). Accordingly, we set forth the facts in the

light most favorable to the jury’s determination that the defendants were guilty of the crimes charged

in the indictment.

In May 1985, Ban cPLUS owned land in the Houston area that was causing it substantial

losses. In order to improve its financial performance, BancPLUS decided to sell the Houston

property and employed James Rash and Neil Freese to locate a purchaser. Rash and Freese

eventually contacted Hal Pettigrew, a land speculator who expressed interest in buying the Houston

property for the stated price of $46 millio n. Pet tigrew, however, indicated that his willingness to

purchase the Houston property was conditioned on BancPLUS’s agreement to buy a tract of property

in return.3

After considering several pieces o f pro perty in Pettigrew’s portfolio, Rash and Freese

expressed interest in 200 acres of undeveloped land in the Dallas area. Although the Dallas property

was featured in Pettigrew’s portfolio, he was not the owner. Once it became clear that BancPLUS

was interested in the Dall as pro perty, however, Pettigrew paid the owner of the land—Lintex

Land—$150,000 in earnest money toward his acquisition of the Dallas property.

On Ma y 28, 1986, Schnitzer, Barber, Freese, Rash, Ross, and Pettigrew toured the Dallas

property by helicopter. Immediately after the tour, the defendants met with Pettigrew to discuss the

proposed conditional sale. During this meeting, Pettigrew stated that the asking price for the Dallas

property was $26 million.

To determine if that price was reasonable, BancPLUS spoke to developers of adjacent

property about the development potential of the Dallas property, hired an engineering firm to

investigate utility

and flood plain issues, and investigated zoning and other issues regarding future

development. As a result of this investigation, BancPLUS concluded that the property was a

desirable investment, in part because it was located near both the Dallas- Fort Worth ai rport and a

planned interstate highway and was zoned for a mix of commercial and residential development. The

defendants also believed that BancPLUS would benefit from owning the Dallas property rather than

the Ho ust o n property because the Dallas real estate market was faring better than its Houston

counterpart.

To complete its due diligence, BancPLUS obtained an appraisal of the Dallas property from

an experienced and accredited appraiser, Robert Brandt. This appraisal indicated that the property

was worth $35 millio n. Although Pettigrew paid for this appraisal and Brandt was not listed in

BancPLUS’s records as an approved appraiser, Brandt had appraised the property for others and had

consistently valued it at $35-36 million.

After BancPLUS determined that Pettigrew had the financial abilit y to make a 20% down

payment on the Houston property from his personal funds and was a creditworthy borrower, Rash

and Freese negotiated the conditional sale with Pettigrew. Pettigrew, through his Cal-Tex4

corporati on, agreed to purchase the Houston property for $46 millio n with a $9 millio n down

payment. In return, BancPLUS, through a subsidiary, agreed to purchase the Dallas property from

Scott’s Cattle for $26 millio n with a $15 millio n dow n payment . Pettigrew was the sole

representative of Scott’s Cattle during these negotiations.

In reality, however, Sco t t ’s Cattle was Pettigrew’s representative in the sale of the Dallas

property

. Before closing, Scott’s Cattle, a corporation previously created by Pettigrew’s lawyer, Ray

Williamson, agreed to act as Cal-Tex’s (and thus ultimately Pettigrew’s) agent in the purchase and

resale of the Dallas property

. In addition, Scott’s Cattle obtained Pettigrew’s purchase rights in the

Dallas property by assignm ent . This agency or nominee relationship between Scott’s Cattle and

Pet t igrew was never formally disclosed to BancPLUS or any of its representatives. Nevertheless,

Williamson once asked Pettigrew why he needed Scott’s Cattle to act as his nominee in the sale of

the Dallas property and Pettigrew responded by st at ing: “They tell me I need one.” At trial,

Williamso n testi fied t hat he believed Pettigrew was referring to BancPLUS when he made this

statement.

As the closing neared, those responsible for handling various aspects of the transaction for

BancPLUS began asking questions about Pettigrew’s involvement in the sale of the Dallas property

.

For example, Bruce Merwin, the lawyer in charge of simultaneously closing both transactions for

BancPLUS, questioned BancPLUS officials, including defendants Ross and Barber, about whether

“Pettigrew or Scott Cattle Company [should] be designated as the [s]eller” of the Dallas property.

He also sent Ro ss and Barber a memorandum stating that the $26 million asking price was

“approximately $6 millio n in excess of fair market value.” In addition, Eric Schumann, an accountant

at BancPLUS, and Peter Hensley, the BancPLUS director responsible for overseeing the accounting

for these transactions, also asked Ross and Barber whether Pettigrew was the seller of the Dallas

land. Ross responded to these inquiries by stating that Pettigrew was not the seller of the Dallas

property and by discouraging additional queries about Pettigrew’s relationship to Scott’s Cattle.

On June 13th, Scott’s Cattle purchased the Dallas land f ro m Lintex Land for $13 million.5

Three days later, the sale of the Houston property by BancPLUS to Cal-Tex for $46 millio n and the

purchase of the Dallas property by BancPLUS from Sco t t ’s Cattle for $26 million closed

simultaneously. At the closing, Pettigrew provided BancPLUS with an affidavit that stated: “I am

not an officer, director, or shareholder of Scott’s Cattle Company. Additionally, t here are no

agreements or understandings under which I hav e a right to become an officer, director, or

shareholder in Scott’s Cattle Company.” Thus, Pettigrew’s affidavit, while true, did not rule out his

participation in other legal arrangements giving him a financial interest in the sale of the Dallas

property

.

The BancPLUS records relating to the conditional sales were then placed in closing binders.

Although these binders did not reveal that Pettigrew was the seller of the Dallas property, they did

contain documents tracing BancPLUS’s circular funding of Cal-Tex’s down payment on the Houston

property

. The payment instructions in these binders indicated that the $15 million down payment by

BancPLUS was wired to Texas Na t io nal Tit le, a company owned, like BancPLUS, by Century

Corporati on. Texas National Title in turn wired the down payment to an account for Scott’s Cattle

at Texas Commerce Bank. Scott’s Cattle then immediately wired $9 million of this $15 million

deposit to a Cal-Tex account at Texas Commerce Bank. Finally, this $9 million was then wired back

to Texas National Title, which in turn wired the money to BancPLUS as the Cal-Tex down payment

on the Houston property

.

The documents in the closing binders also revealed that Scot t ’s Cattle had purchased the

Dallas property and then immediately sold it to BancPLUS. These records did not, however, reveal

that Scott’s Cattle had purchased the Dallas property for $13 million. Further, although this sale

price was listed in records located at Texas National Title, it was not a matter of public record.

After these transactions closed, the financial condition of BancPLUS appeared to be

significant ly improved . BancPLUS had reduced its exposure on its real estate holdings and had

replaced burdensome property with potentially profitable property in a better real estate market.

Moreover, because BancPLUS’s accountants believed that Pettigrew was not the seller of the Dallas1 This testimony was admitted into evidence at trial.

6 property based on Ross’s statements and Pettigrew’s affidavit, they recorded a profit from the sale

of the Houston property

. Thus, from an accounting point of view, the sale of the Houston property

had generated a profit that made BancPLUS profitable for the first time in its history.

By mid-1987, however, BancPLUS’s financial outlook had dimmed considerably. Cal-Tex

defaulted on its loan for the Houston property

, and BancPLUS was forced to foreclose on the land.

As a result, the profit that BancPLUS had recorded on the sale could not be real ized. Examiners

from the Federal Home Loan Bank Board (FHLBB), moreover, were conducting a yearly audit of

BancPLUS at this time. Based on their review of the circular funding instructions and the Pettigrew

affidavit, the auditors suspected that Pettigrew was involved in the sale of the Dallas property and

that BancPLUS had improperly accounted for the conditional sales under Financial Accounting

Standards Board (FASB) 66. After the defendants arranged for the examiners to review records held

by Texas National Title, the examiners determined that Pettigr e w was the seller of the Dallas

property

, that a profit could not be booked on the related transactions, and that the profit recorded

by BancPLUS would have to be reversed.

The events unfolding at BancPLUS eventually attracted the attenti on of the Resolution Trust

Corporati on (RTC). During his discussions with the RTC, Barber stated that he knew Pettigrew “had

to have something to do with” the sale of the Dallas prope rt y, but t hat he believed the sale of the

Ho uston property and the purchase of the Dallas property were separate from an “account ing

standpoint.”

II. Procedural History

The investigations by federal banking regulators led to the convening of a grand jury. In an

effort to fend off criminal charges, Schnitzer elected to testify. Although he did not admit that he

knew Pettigrew was the seller of the Dallas property

, Schnitzer testified that he, like Barber, had been

“suspicious” of Pettigrew’s role in the sale of that property

. 1 Schnitzer’s testimony, however, did not7

have the desired effect, for the grand jury indicted the defendants.

At trial, the government presented numerous and shift ing theories of why the defendants

should be found criminally liable for their roles in negotiating, approving, and accounting for the sale

of the Houston property and the purchase of the Dallas property

. The defendants rested at the close

of the government’s case and together moved for a judgment of acquittal on all counts. The district

court denied this motion, and the jury then convicted the defendants on the four counts contained in

the indictment.

After the verdict, the defendants renewed their joint motion for judgment of acquittal and, in

the alternative, moved for a new trial. The district court grant ed this motion and acquitted each

defendant on all charges because of insufficient evidence. With respect to the false entry count, the

district court stated that the validity of the conviction turned on “whether the government has shown

beyond a reasonable doubt that [the] defendants knew of the falsity of Pettigrew’s affidavit and of

his involvement with Scott’s [Cattle].” Because the district court found that the government failed

to prove beyond a reaso nable doubt that the defendants knew that Pettigrew was the seller of the

Dallas property

, it granted each defendant an acquittal on the false entry count. With respect to the

mi sapplication of funds and bank fraud counts, the district court concluded that the government’s

evidence failed to show beyond a reasonable doubt that the sale of the Houston property in exchange

for the purchase of the Dallas property was a sham as the indictment charged. Instead, the district

court believed the evidence before the jury demonstrated that these conditional sales constituted “a

legitimate value-for-value transaction.” In the alternative, the district court al so ordered a new

trial on all counts. The district court justified this decision on the grounds that the verdict, even if

supported by sufficient evidence, was nevertheless against the great weight of the evidence and that

the government placed undue emphasis on an err o neo us understanding of the relevant accounting

regulations governing the savings and loan industry in 1986.

III. Discussion

A. False Entry2 This statute provides, in pertinent part:

Whoever, being an officer, agent, or employee of

. . . any lending [institution]

. . . authorized or acting under the laws of the United States, or any institution

. . . the accounts of which are insured by the Federal Deposit Insurance Corporati on,

. .

. with the intent to defraud any such institution

. . . , or to deceive any officer, auditor,

examiner, or agent of any such institution or of [an y] department or agency of the

United States, makes any false entry in any book, report, or stat ement of or to any

such institution

. . . shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

18 U.S.C. § 1006.

8 To establish a false entry in violation of 18 U.S.C. § 1006, 2 the government must prove: 1)

that BancPLUS was a lending institution authorized by and acting under the laws of th e United

States; 2) that t he defendants were officers, agents, or employees of BancPLUS; 3) that the

defendants knowingly and willfully made, or caused to be made, a false entry concerning a material

fact in a BancPLUS book, report, or statement; and 4) that the defendants acted with the intent to

injure or defraud BancPLUS or any of its officers, auditors, examiners, or agents. United States v.

Parks

, 68 F.3d 860, 865 (5th Cir. 1995); see also United States v. Shunk

, 113 F.3d 31, 34 (5th Cir.

1997) (holding that materiality is an element of a § 1006 offense notwithstanding the Supreme

Court’s decision in United States v. Wells , 117 S. Ct. 921 (1997), which held that materiality is not

an element of an 18 U.S.C. § 1014 offense).

The defendants contend that the government failed to prove that BancPLUS’s rec ords

contained a false statement either b ecause these records accurately reflected all of the information

known by the defendants or because the recognition of profits on the sale of the Houston property

was consistent with federal banking regulations. In addition, the defendants assert that even if

BancPLUS’s records contained a false statement, they did not cause this entry to be made. Finally,

the defendants claim that absent proof of causation, there is no basis for finding that they acted with

the requisite intent.

In response, the government first contends that either the recognition of profits from the sale

of the Houston property

, in violation of BancPLUS accounting po licies, or the omission from the3 The indictment in this case specified that the omission of Pettigrew’s financial interest in

the sale of the Dallas property constituted the false entry. This o missio n and the resulting false

statement of profits are merely flip sides of the same coin. Accordingly, our analysis of the

government’s proof of causation and intent under its first theory of false entry applies equally to either

articulation of the false entry.

9 closing binders of Pettigrew’s financial interest in the Dallas Property

, constituted the false entry of

material fact. See Parks

, 68 F.3d at 865 (stating that a “false entry can be

. . . an omission of material

information”). 3 The government maintains that the defendants caused this false entry by failing to

disclose to Banc PLUS’s accountants that Pettigrew was the seller of the Dallas property. To

complete its first theory of false entry, the government asserts that the defendants purposely withheld

this information to deceive federal bank examiners as to the profitability of BancPLUS because they

knew that BancPLUS’s accountants would not book an immediate profit on the sale of the Houston

property if told of Pettigrew’s true role in the sale of the Dallas property.

To prove this theory of false entry, the government introduced evidence that the defendants

knew that Pettigrew was the seller of the Dallas property

. To begin with, the government’s witnesses

testified that the defendants knew that Pettigrew had conditioned his purchase of the Houston

property (through Cal-Tex) on BancPLUS’s agreement to purchase a parcel of property in return.

In addition, the government demonstrated that the defendants negotiat ed solely with Pettigrew

regarding BancPLUS’s purchase of the Dallas property

. Based on these facts alo ne, Barber and

Schnitzer admitted t hat t hey suspected that Pettigrew was the seller of the Dallas property, and

Schumann and Hensley told the defendants that Pettigrew could be viewed as the seller of the Dallas

property

. Further, based on his review of the closing documents, Merwin asked Ross and Barber if

BancPLUS was purchasing the Dall as pro perty from Pettigrew. In light of this evidence, the jury

could have reasonably concluded that the defendants were more than suspicious of Pettigrew’s role

in the sale of the Dallas property and in fact knew, based on the structure of the transacti on,

Pettigrew’s overarching involvement in the negotiations, and the questions raised by those reviewing

the transaction for BancPLUS, that Pettigrew was the seller of that property.4 The defendants also contend that the evidence did not support an instruction on deliberate

ignorance and that they are therefore entitled to a new trial. We disagree. As the government notes,

t here was evidence that would allow a jury to conclude that the defendants in fact knew t hat

Pettigrew was the seller of the Dallas property or that the defendants deliberately avoided learning

that Pettigrew was the seller by refusing to determine if Scott’s Cattle was his nominee or agent when

confronted with the questioning by Schumann, Hensley, and Merwin and the obviously incomplete

affidavit. Under these circumstances, a deliberate ignorance inst ruct io n was not improper. S ee

United States v. Chen , 913 F.2d 183, 192 (5th Cir. 1990).

10 Contrary to the defendants’ suggestion, the affidavit provided by Pettigrew does not preclude

a finding that Pettigrew was the seller of the Dallas property

. Although the affidavit could

reasonably be viewed as allaying the defendants’ suspicions that Pettigrew was affiliat ed with Scott’s

Cattle as an officer, director, or shareholder, a jury could also reasonably conclude that this affidavit

was itself suspicious because it did not rule out other legal arrangements whereby Scott’s Cattle could

operate as Pettigrew’s nominee. Further, Williamson testified that Pettigrew stat ed t hat he was

instructed to obtain a nominee for the sale of the Dallas property. The jury, like Williamso n, could

infer that it was the defendants, with whom Pettigrew had been negotiating, who instructed him to

obtain a nominee. Thus, when considering all the evidence, a reasonable juror could conclude that

the defendants knew that Pettigrew was the seller of the Dallas property. 4

The evidence also sup po rt ed t he jury’s finding that the defendants’ failure to inform

BancPLUS’s accountants that Pettigrew was the seller of the Dallas property caused the accountants

to record falsely a profit on the sale of the Houston pr operty. Each BancPLUS accountant

responsible for recording these transactions testified that he would not have recorded an immediate

profit on the sale of the Houston property had he known that Pettigrew was the seller of the Dallas

property

. Thus, the government adequately proved that the defendants’ concealment of Pettigrew’s

role in the sale of the Dallas property caused BancPLUS’s accountants to record a profit that was

false under BancPLUS’s accounting policies. That this false statement of profits caused by the

defendants’ omission of Pettigrew’s financial interest in the sale of the Dallas pro perty “had the

capacity to impair or pervert the functioning of” BancPLUS is not in dispute. Accordingly, the false

entry was materia l, s ee Parks

, 68 F.3d at 865, and the government’s proof of the third element of5 The defendants do not contest that the evidence of a conspiracy was sufficient. Instead,

they argue that they agreed to pursue, and acted in furtherance of, a lawful business objective.

11 false entry was sufficient.

Finally, there was sufficient evidence to support a finding that the defendants acted with the

intent to deceive federal regulators when causing the false statement of profits by co ncealing

Pettigrew’s actual involvement in the transaction. The jury could have reasonably concluded that

given BancPLUS’s history of losing money, the appearance of profitability was necessary to stave

off federal supervision of BancPLUS’s operations or to o bt ain federal approval for certain

transactions that the defendants were interested in pursuing. Therefore, under the government’s first

theory of false entry and conspiracy to commit false entry, there was sufficient evidence to sustain

each defendant’s conviction because the government adequately proved each element of t h ese

offenses. 5

Had this been th e o nly t heory of false entry before the jury, then we would reinstate each

defendant’s conviction on this count and its conspiracy analog. But the government also argued that

the booking of a profit on the sale of the Houston property constituted a false entry beca use the

federal banking regulations in effect in 1986, which the government believed incorporated FASB 66,

precluded a bank from recording a profit on the sale of real property when it financed the purchaser’s

down payment on that property

. Consistent with this understanding of the relevant regulations, the

government also tried the false entry count on the alternate theory that the defendants caused the

violation of FASB 66 and the resulting false entry by concealing evidence of the circular funding of

the Cal-Tex down payment on the Houston property from Banc PLUS’s accountants. The

government maintained that the defendants withheld this information from the accountants in order

to d eceive regulators as to the profitability of BancPLUS because the defendants knew that the

accountants would not record a profit on the transaction under FASB 66 if this information were

revealed. Thus, the government contends that the evidence regarding the violation of FASB 66 was

relevant because it demonstrated that the recognition of profits from the sale of the Houston property12

constituted a false entry and that the defendants concealed the circular funding from the accountants

with the intent to deceive federal examiners.

The district court, however, correctly recognized that this second theory of false entry should

not have been before the jury. To begin with, the government’s position that BancPLUS’s immediate

recognition of profits violated federal banking regulations is foreclosed by our precedent. In United

States v. Baker

, we reviewed the “Regulatory Accounting Principles (RAP)” in effect in 1986 and

determined that under these regulations, a bank could sell its real estate holdings, “finance[] 100%

of [a purchaser’s] loan[], and book[] a profit at the inception of the loan.” 61 F.3d 317, 321 (5th Cir.

1995). Accordingly, the government’s second theory of false entry is “contrary to law” because it

is “`based on an erroneous view’” of the applicable federal regulations. S ee Griffin v. United States

,

112 S. Ct. 466, 474 (1991) (quoting United States v. Townsend

, 924 F.2d 1385, 1414 (7th Ci r.

1991)).

In addition, the evidence regarding the alleged violation of FASB 66 was also inadmissible

because it was not introduced for the permissible purpos e o f sho wing the defendants’ intent to

deceive federal regulators. S ee United States v. Cordell

, 912 F.2d 769, 775 (5th Cir. 1990) (holding

that evidence of violations of civil banking regulations may be introduced for the limit ed purpose of

establishing a defendant’s motive or criminal intent); United States v. Christo

, 614 F.2d 486, 490-92

(5th Cir. 1980) (holding that the government may not prove a criminal violation of federal banking

law solely by proving a violation of a civil banking regulation). In order for this alleged violation to

be probative of the defendants’ intent to deceive federal regulators as to BancPLUS’s profitability,

the government needed to demonstrate that the defendants con cealed t he circular funding from

BancPLUS’s accountants because they knew t hat these accountants would interpret FASB 66 to

preclude the recognition of an immediate profit on the sale of the Houston pro pert y. The

government, however, fai led t o show that the defendants concealed the circular funding from

BancPLUS’s accountants, for the closing binders given to the accountants revealed that BancPLUS

had funded the Cal-Tex down payment on the Houston property

. More importantly, Hensley, the13

BancPLUS director in charge of accounting for the sale of the Houston property

, unequivocally

t est ified that he would have booked a profit on the sale of the Houston property even if the

defendan t s had explicitly told him of the circular funding, notwithstanding the government’s

contention that this accounting treatment would have violated FASB 66. The evidence regarding the

alleged regulatory violation, therefore, was not probative of the defendants’ intent to deceive federal

regulators as to BancPLUS’s profitability. Accordingly, the government’s evidence regarding FASB

66 should have been excluded.

The admission of this evidence, moreover, created the risk that its exclusion was designed to

avo id. As a result of the government’s failure to connect the evidence regarding FASB 66 to t he

defendant’s inte nt t o deceive federal banking regulators, the jury was left only with Carlton’s

testimony that the booking of a profit on the sale of the Houston property constituted a false entry

because it purportedly violated FASB 66. The government, however, elicited this testimony after

Hensley, another government witness, had already testified that the disclosure of the circular funding

would not have precluded BancPLUS from recording a profit on the sale of the Houston property.

Even more troubling is the fact that the government closed by telling the jury: “Now, if we’re just

going to ignore the regu lat io ns and the way the institutions are run, then we might as well give

bankers a shoe box and let t hem just keep the money in it.” These events indicate that the

government “improperly focus[ed] the jury’s attention to the prohibitions of” FASB 66 rather than

the elements of a § 1006 violation and thus “impermissibly infected the very purpose for which the

trial was being conducted.” C hristo

, 614 F.2d at 492

. T hus, by not excluding evidence of the alleged

regulatory violation, the district court opened the door for t he government’s legally impermissible

“attempt to bootstrap a . . . civil regulatory violation into [a] . . . felon[y].” Id. at 492.

The risk of a legally unsound false entry conviction was further heightened by the distri ct

court’s failure to close the door on the government’s second theory of false entry before submitting

the case to the jury. By instructing the jury that the evidence of the violation of FASB 66 could not

by itself support a conviction and was relevant, if at all, only as evidence of the defendants’ intent,6 This statute provides:

Whoever, being an officer, agent, or employee of

. . . any lending [institution]

. . . authorized or acting under the laws of the United States or any institution

. . . the

accounts of which are insured by the Federal Deposit Insurance Corporati on, willfully

misapplies any moneys, funds, credits, securities, or other things of value belonging

to such institution

. . . shall be fined not more than $1,000,000 or imprisoned not

more than 30 years, or both.

18 U.S.C. § 657

.

14 the district court could have minimized t he potential impact of this irrelevant evidence. S ee, e.g.

,

United States v. Brechtel

, 997 F.2d 1108, 1115 (5th Cir. 1993); Cordell

, 912 F .2d at 775. The

district court, however, refused the defenda nt s’ request for this limiting instruction. Further, by

instructing the jury to disregard the evidence relating to FASB 66 in its entirety because of its

irrelevance under the government’s permissible and supported theory of false entry, the district court

could have perhaps eliminated any possible prejudice to the defendants. See Griffin , 112 S. Ct. at

474; Christo , 614 F.2d at 492. The district court, however, also failed to take this step.

To its credit, the district court later recognized the troubling implications of its evidentiary

rulings and the government’s alternate theory of false entry and granted a new trial on this count.

Under these circumstances, we hold that the district court did not clearly abuse its discretion in taking

this action “in the interests of justice.” Fed. R. Crim. P. 33; U nited States v. Robertson

, 110 F.3d

1113, 1118 (5th Cir. 1997) (noting that a district court’s decision to grant a new trial is reviewed for

a clear abuse of discretion). We therefore remand for a new trial on the government’s permissible

theory of false entry and the related conspiracy charge.

B. Misapplication of Funds

To establis h a misapplication of BancPLUS funds in violation of 18 U.S.C. § 657, 6 the

government must prove: 1) that BancPLUS was authorized under the laws of the United States; 2)

that the defendants were officers or directors of BancPLUS; 3) that the defendants knowingly and

willfully misapplied BancPLUS funds; 4) that the defendants misapplied these funds with the intent

to injure or defraud the institution. P arks

, 68 F.3d at 863. The government can prove the necessary7 As the term is used in B euttenmuller

, equity value is calculated by subtracting the debts

owed on a piece of property from its appraised value. 29 F.3d at 980 n.15.

15 intent by “`showing a knowing, voluntary act by [each] defendant, the natural tendency of which may

have been to injure the bank even though such may not have been his motive.’” I d. (quoting United

States v. Parekh , 926 F.2d 402, 408 (5th Cir. 1991)).

The defendants contend that the government failed to prove that they misapplied BancPLUS

funds. Relying on our decision in Beuttenmuller , they argue that the government failed to prove a

criminal misapplication because BancPLUS sold burdensome property

, reduced its real estate

holdings, and obtained some t hing o f value—the Dallas property—in exchange for the $26 million

purchase price and the $15 millio n down payment. The government, on the other hand, argues that

BancPLUS’s purchase of the Dallas property for $26 millio n constituted a criminal misapplication

of BancPLUS funds because the defendants knew that Scott’s Cattle had paid only $13 million for

the property a few days before.

In Beuttenmuller , Shamrock Savings, like BancPLUS, owned burdensome real estate—the

Tanglewood property

. 29 F.3d at 975. Shamrock decided to sell the Tanglewood property because

it was causing the savings and loan substantial losses. The Southmeadow Joint Venture, which was

formed by Larry Gill and Richard Billings, expressed interest in purchasing the Tanglewood property

.

At that time, Gill and Billings were also operating the Mansfield 150 Joint Venture to develop some

real estate known as the Mansfield property

, which had an appraised value of over $4 millio n and an

equity value of approximately $1.8 million. 7 Just as Pettigrew, through Scott’s Cattle, conditioned

the Cal-Tex purchase of the Houston property on BancPLUS’s agreement to buy the Dallas property

,

Gill and Billings, through the Southmeadow Joint Venture, conditioned their agreement to purchase

the Tanglewood property on Shamrock’s agreement to buy a 45% share in the Mansfield 150 Joint

Venture, which owned nothing but the Mansfield property. Id. at 975-76.

Shamrock agreed to the conditional sales and the par t ies est ablished a circular funding

arrangement identical

t o t he one in t his case. Shamrock agreed to purchase a 45% share of the16

Mansfield 150 Joint Venture for $753,000. In exchange, the Southmeadow Joint Venture agreed to

purchase the Tanglewood property for $2.725 millio n with a 20% down payment of $555,000. Gill

and Billings then returned $555,000 of the $753,000 Shamrock payment to Shamrock as

Southmeadow Joint Venture’s down payment on the Tanglewood property. Id. at 975-77.

Like BancPLUS, Shamrock recorded an immediate profit on the sale of its property. Id. at

977. As in this case, ho wever, Shamrock later foreclosed on the real estate it sold when the

purchaser defaulted on its loan. Id. at 978.

As a result of their roles in this transaction, Gill and Billings were indicted. Gill was charged

with aiding and abetting bank fraud and the misapplication of Shamrock funds. Beuttenmuller, the

lawyer responsible for closing the transaction for Shamrock, was charged with conspiracy to commit

bank fraud. Both were tried before a jury, and both were convicted. Id.

On appeal, this court reversed their convictions reasoning that Shamrock’s purchase of a 45%

interest in the Mansfield Joint Venture and its circular funding of the Southmeadow Joint Venture

down payment on the Tanglewood property could not constitute a criminal misapplication of funds

or bank fraud unless “Shamrock Savings effectively gave Gill and Billings the down payment money”

for the purchase of the Tanglewood property

. I d. at 979. But as the court noted, Shamrock did not

provide Gill and Billings this down payment money as a gift. Instead, by investing in the Mansfield

150 Joint Venture, Shamrock acquired a 45% interest in the Mansfield property

. Id. at 979-80.

Under these circumstances, criminal liabilit y for bank fraud and misapplication turned on whether “the

Mansfield property had no value” or the value of this property “was so low that the transaction was

essentially a sham designed to cover the fact that Shamrock Savings was gratuitously providing Gill

and Billings with the down payment money.” Id. at 980.

The court concluded that a reasonable juror could not find beyond a reasonable doubt that

the transaction was a sham. In exchange for its $753,000 cash payment, Shamrock obtained a 45%

interest in property with an appraised value of over $4 million and approximately $1.8 million in

equity value. Thus, the record in B euttenmuller clearly indicated that the sale of the Mansfield8 The defendants elicited this testimony to show that they cooperated wit h t he FHLBB

investigation.

17 property to Shamrock was not part of a “criminal venture” because it was “wit hin the range of a

value-for-value transaction.” Id.

Given the factual parallels between this case and Beuttenmuller

, we find that the defendants’

convictions for misapplication cannot stand un less the government’s evidence sufficiently

demonstrates that BancPLUS’s payment of $26 millio n for the Dallas property was outside the range

of a value-for-value transaction. Notwithstanding the fact that the price that Scott’s Cattle paid for

the Dallas property was not a matter of public record and the absence of evidence indicating that

anyone who knew of this price p rovided it to the defendants, the government argues that

BancPLUS’s $26 million purchase price was not within the range of a value-for-value transaction

because the defendants knew that Scott’s Cattle had paid only $13 million for this property. In

support of its contention that the defendants were aware of the Scott’s Cattle purchase price, the

government points to evidence in the record that Century Corporati on, which owned BancPLUS, also

owned Texas National Title, where the records documenting the Scott’s Cattle purchase price were

loca t ed. To show that the defendants had access to the records at Texas National Title, the

government notes that Carlton testified on cross examination that the defendants arranged for her to

have access to the records at Texas National T itle upon her request. 8 From these two pieces of

evide nce, the government contends that the jury could reasonably infer that the defendants gained

access to the records and Texas National Title and discovered Scott’s Cattle’s $13 millio n purchase

price.

For this inferen ce t o be a reasonable one, and not the result of unguided speculation, the

government needed to provide the jury with at least two pieces of additional evidence: 1) testimony

or corporate documents demonstrating that the defendants could have taken certain steps to obtain

for themselves the records at Texas National Title documenting Scott’s Cattle’s $13 millio n purchase

price fo r t he Dallas Property; and 2) testimony indicating that the defendants were likely to have18

taken these steps in the three days following Scott’s Cattle’s purchase of the Dallas property from

Lintex Land. The government, however, never asked its witnesses from Texas National Title whether

the defendants, by virtue of their positions at BancPLUS or Century Corporati on, had or were given

access to the records at Texas National Title documenting the price Scott’s Cattle paid for the Dallas

property

. Likewise, the government failed to elicit testimony explaining why the defendants would

have sought these records in the three days preceding the simultaneous closings on BancPLUS’s sale

of the Houston property and purchase of the Dallas property

. We therefore hold that the government

failed to prove sufficiently that the defendants knew, at the time BancPLUS purchased the Dallas

property for $26 million, that Scott’s Cattle was selling this property for a $13 million profit.

Consequently, there were only two pieces of evidence before the jury establishing the value

of the Dallas propert y at the time of BancPLUS’s purchase. On the one hand, Merwin’s

memorandum, which was sent to Ross and Barber, indicated that the $26 millio n purchase price was

$6 millio n over fair market value. On the other hand, Brandt’s appraisal, which was furnished to the

defendants, suggested that the Dallas property was worth $35 millio n. Although the government

argues that the jury could discredit this appraisal because it was paid for by Pettigrew, this argument

ignores the fact that Brandt’s prior appraisals on the Dallas property clearly indicated that Pettigrew’s

involvement did not affect Brandt’s valuation. Thus, the evidence before the jury established that

BancPLUS knew that the Dallas property had a fair market value between $20 and $35 million and

agreed to the $26 million price after performing due diligence. Under these circumstances, a

reasonable juror could not conclude that a purchase price of $26 millio n was outside the range of a

value-for-value transaction.

In the alt ernat ive, the government, focusing solely on the purchase of the Dallas property,

argues that the $6 millio n porti on of the $15 millio n down payment that was not used to fund the CalTex down payment on the Houston property represents a separate misapplication. We do not dispute

that there may be circumstances where a large down payment will constitute a misapplication even

when part of a value-for-value transaction. The government, however, did not prove a criminal9 This theory of fraud could also be used, although not on the facts of this case, t o

demonstrate that the circular funding in an otherwise facially v alid value-for-value transaction

constituted a criminal misapplication of funds.

19 misapplication in this case simply by demonstrating that the defendants, in order to secure Pettigrew’s

purchase of the Houston property

, provided him with a $15 millio n rathe r t han a $9 million down

payment on the Dallas property

. To impose criminal liability under these circumstances would punish

the defendants for taking the steps necessary to sell BancPLUS’s nonperforming property and reduce

its real estate holdings. For the portion of the BancPLUS down payment that was not used to fund

the Cal-Tex down payment on the Houston prop ert y t o constitute a criminal misapplication of

BancPLUS funds, the government was obligated to prove that this excess funding was itself a sham.

Cf. id. at 980 (requiring proof that value was not received in exchange for value given). 9

Although the government does not expressly argue that BancPLUS did not receive value in

exchange for the additional $6 millio n, it implies that the defendants knew, or had reason to believe,

that Pettigrew, through Cal-Tex, was unlikely to return this money in the form of loan payments on

the Houston property

. C

f. Parekh

, 926 F.2d at 407 (stating that a loan is a sham “if there was little

likelihood or expectation that the named debtor would repay”) (quotati ons omitted). The evidence,

however, shows that the defendants investigated Pettigrew’s financial cond it io n befo re selling the

Houston property to Cal-Tex and determined that Pettigrew had the resources, independent of the

proceeds of the sale of the Dallas property

, to make this purchase and to make him a good credit risk.

Accordingly, without additio nal evidence indicating that Pettigrew was unlikely to repay the

BancPLUS loan, a reasonable juror could not conclude that the large down payment was a sham

rather than a necessary component of a value-for-value transaction. C f. id. (holding that proof of the

debtor’s abilit

y to repay the loan will not necessarily preclude a finding that the loan was a sham when

there is additional evidence suggesting that the borrower is nevertheless unlikely to repay).

In conclusion, we hold that the evidence was ins ufficient to sustain the defendants’

convictions for misapplying BancPLUS funds under either of the government’s t heories. We1 0 I n re levant part , t he broad language of this statute imposes criminal liability on

“[w]hoever knowingly executes, or attempts to execute, a scheme or artifice to defraud a financial

institution.” 18 U.S.C. § 1344(1)

.

1 1 This statement of the elements of a § 1344 offense is a succinct summation of our holdings

on this subject. S ee, e.g.

, United States v. Saks , 964 F.2d 1514, 1518 (5th Cir. 1992) (defining a

“scheme to defraud” to include “any false or fraudulent pretenses or representations intended to

deceive others in order to obtain something of value, such as money, from th e institution to be

deceived” and stating that the “requisite intent to defraud is establi shed if the defendant acted

knowingly and with the specific intent to deceive, ordinarily for the purpose of causing some financial

loss to another or bringing about some financial gain to himself”); see also United States v. Barakett

, 994 F.2d 1107, 1111 (5th Cir. 1993) (holding that a “knowing execution of [a] scheme[] causing [a]

risk of loss—rather than actual loss—to the institution, can be sufficient to support [a] conviction”);

Parekh

, 926 F.2d at 408 (holding that the “intent to defraud” element, in the context of a false entry charge, “is pr o ven by showing a knowing, voluntary act by the defendant, the natural tendency of

whic h may have been to injure the bank even though such may not have been his motive.”)

(quotations omitted).

20 therefore affirm the district court’s decision to acquit each defendant on the charges that he conspired

to misapply BancPLUS funds and m isapplied BancPLUS funds. B euttenmuller

, 29 F.3d at 980

(“Because the government has failed to provide sufficient evidence that the object of the conspiracy

was illegal, we reverse Beuttenmuller’s conviction for conspiracy.”).

C. Bank Fraud

To establish bank fraud in violation of 18 U.S.C. § 1344(1), 10 the government must prove:

1 ) t hat the “defendant[s] engage[d] in . . . a pattern or course of conduct designed to deceive

[BancPLUS], a federally chartered or insured inst i tution, into releasing property;” and 2) that the

defendants act ed wit h the “intent to victimize [or injure BancPLUS] by exposing it to actual or

potential loss.” United States v. Stavroulakis , 952 F.2d, 686, 694 (2d Cir. 1992). 11

The defendants contend that the government’s evidenc e was insufficient to show that they

acted with the requisite intent because the purchase of the Dallas property was a value -for-value

transaction. In response, the government once again argues that the purchase of the Dallas property

was a sham that caused BancPLUS an actual loss of $13 million—t he difference between the prices

paid by BancPLUS and Scott’s Cattle. The government maintains that the evidence was sufficient

to show that the defendants negotiated and approved the purchase of the Dallas property with the1 2 The government did not argue that this transaction posed a risk of loss because BancPLUS

needed the down payment funds on the Dallas property to satisfy other obligations and, in light of our holding that the transaction was not a sham, could not argue that the purchase of the Dallas property

constituted bank fraud because it precluded the use of these funds for legitimate banking purposes.

See Parekh , 926 F.2d at 408.

21 intent to injure BancPLUS because they knew of Scott’s Cattle’s purchase price.

As we have noted, however, the government failed to prove that the defendants knew that

Scott’s Cattle purchased the Dallas property for $13 millio n. Consequently, the government also

failed to prove that the defendants acted with the intent to injure Banc PLUS by causing it a $13

million actual loss. In fact, because BancPLUS’s purchase of the Dallas property was a value-forvalue transaction, the evidence indicates that the risk of loss associated with BancPLUS’s purchase

of the Dallas property was the risk of overpayment inherent in every decision to acquire valuable real

estate for value. 12 We therefore also find that the government failed to show that the purchase of

the Dallas property exposed BancPLUS to a risk of lo ss sufficient to support criminal liability for

bank fraud. C

f. Beuttenmuller

, 29 F.3d at 981 (implying that the risk of overpayment in a value-forvalue transaction is insufficient to sustain a conviction for bank fraud because this type of transaction

is not a “criminal venture”).

In the alternative, the government contends that the cir cular funding of Pettigrew’s down

payment on the Houston pr o perty exposed BancPLUS to a potential loss by elevating the risks

associated with this otherwise lawful transaction. As we discussed in connection with our analysis

of the government’s proof of misapplication, a bank’s circular funding of a down payment on bank

prope r ty may lead to criminal liabilit y if bank o fficials know or have reason to believe that the

purchasing party will be unable to repay its loan. In such cases, a risk of loss exists because the bank

is likely to reacquire costly property. Saks

, 964 F.2d at 1519. Further, insofar as a bank provides

a purchaser with funds exceeding a 20% down payment on bank property but requires only a 20%

down payment notwithstanding the likelihood that this purchaser will default, there is a greater risk

associated with the circular funding because the bank is unlikely to see the return of the excess funds1 3 The government also argues that Carlton’s testimony that unspecified conduct by the

defendants exposed BancPLUS to civil sanctions was sufficient to prove BancPLUS’s exposure to

a potential loss. S ee Parekh

, 926 F.2d at 408. We reject this argument because the jury had no basis

for connecting this testimony with the government’s theories of bank fraud. In fact, given its context,

this statement likely refers to the purported impropriety of BancPLUS’s recording a profit on the sale

o f t he Ho ust o n property in light of the circular funding rather than the propriety of the circular

funding itself under federal banking regulations.

22 in the form of loan payments.

These risks, however, were not present in this case because Banc PLUS determined that

Pettigrew could have paid the down payment on the Houston property with funds unrelated to the

proceeds of the sale of the Dallas property and was a creditworthy borrower. Thus, from a risk

pe rspect ive, it was immaterial whether the down payment funds came from the sale of the Dallas

property or whether Pettigrew transferred the funds from his bank account to BancPLUS and then

immediately replac ed these funds with the BancPLUS down payment on the Dallas property.

Consequently, the risk of default associated with the sale of the Houston property to Pettigrew was

no different than the risk of default that accompanies every loan properly mad e to a credi tworthy

individual. Thus, we also find that the government failed to show that the circular funding of the CalTex down payment on the Houston pr o pert y expo sed BancPLUS to a risk of loss sufficient to

support criminal liabilit

y for bank fraud. C

f. Beuttenmuller

, 29 F.3d at 981 (voiding a conviction for

bank fraud notwithstanding the fact that he defaulted on his loan from the bank that circularly funded

his down payment on the purchase of bank real estate); P arekh

, 926 F.2d at 407 (suggesting that

additional evidence regarding the risk of default is necessary to establish bank fraud in these

circumstances); United States v. Bridges , 820 F. Supp. 475, 476 (W.D. Mo. 1993) (acquitting the

defendant of bank fraud because “[i]f there was a risk [of loss] suggested in the present case, it cannot

be classifi ed as high risk, or anything demonstrably more hazardous than the risk of a normal

loan.”). 13 Because t he go vernment failed to provide sufficient evidence regarding BancPLUS’s

exposure to an actual or potential loss, we affirm the district court’s decision to acquit the defendants

on t he charges of conspiring to commit bank fraud and committing bank fraud. B euttenmuller

, 2923

F.3d at 980 (“Because the government has failed to provide sufficient evidence that the object of the

conspiracy was illegal, we reverse Beuttenmuller’s conviction for conspiracy.”).

IV.

For the foregoing reasons, we REVERSE the judgment of acquittal for each defendant on the

false entry count and the related conspiracy charge, AFFIRM the district court’s decision to grant

each defendant a new trial on the false entry count and its conspiracy counterpart, REMAND for a

new trial on t hese t wo charges, and AFFIRM the judgment of acquittal for each defendant on the

misapplication of funds and bank fraud counts and the related conspiracy charges.