Opinion ID: 754755
Heading Depth: 2
Heading Rank: 1

Heading: False Entry

Text: 23 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 the United States; 2) that the 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, 519 U.S. 482, 117 S.Ct. 921, 137 L.Ed.2d 107 (1997), which held that materiality is not an element of an 18 U.S.C. § 1014 offense). 24 The defendants contend that the government failed to prove that BancPLUS's records contained a false statement either because 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. 25 In response, the government first contends that either the recognition of profits from the sale of the Houston property, in violation of BancPLUS accounting policies, or the omission from the 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 BancPLUS'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. 26 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 negotiated solely with Pettigrew regarding BancPLUS's purchase of the Dallas property. Based on these facts alone, Barber and Schnitzer admitted that they 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 Dallas property 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 transaction, 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. 27 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 affiliated 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 stated that he was instructed to obtain a nominee for the sale of the Dallas property. The jury, like Williamson, 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 28 The evidence also supported the 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 property. 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 property had the capacity to impair or pervert the functioning of BancPLUS is not in dispute. Accordingly, the false entry was material, see Parks, 68 F.3d at 865, and the government's proof of the third element of false entry was sufficient. 29 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 concealing 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 obtain 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 these offenses. 5 30 Had this been the only theory 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 because 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 BancPLUS's accountants. The government maintained that the defendants withheld this information from the accountants in order to deceive 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 property constituted a false entry and that the defendants concealed the circular funding from the accountants with the intent to deceive federal examiners. 31 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. See Griffin v. United States, 502 U.S. 46, 112 S.Ct. 466, 474, 116 L.Ed.2d 371 (1991) (quoting United States v. Townsend, 924 F.2d 1385, 1414 (7th Cir.1991)). 32 In addition, the evidence regarding the alleged violation of FASB 66 was also inadmissible because it was not introduced for the permissible purpose of showing the defendants' intent to deceive federal regulators. See 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 limited 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 concealed the circular funding from BancPLUS's accountants because they knew that these accountants would interpret FASB 66 to preclude the recognition of an immediate profit on the sale of the Houston property. The government, however, failed to 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, the BancPLUS director in charge of accounting for the sale of the Houston property, unequivocally testified that he would have booked a profit on the sale of the Houston property even if the defendants 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. 33 The admission of this evidence, moreover, created the risk that its exclusion was designed to avoid. As a result of the government's failure to connect the evidence regarding FASB 66 to the defendant's intent to 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 regulations and the way the institutions are run, then we might as well give bankers a shoe box and let them 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. Christo, 614 F.2d at 492. Thus, by not excluding evidence of the alleged regulatory violation, the district court opened the door for the government's legally impermissible attempt to bootstrap a ... civil regulatory violation into [a] ... felon[y]. Id. at 492. 34 The risk of a legally unsound false entry conviction was further heightened by the district 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, the district court could have minimized the potential impact of this irrelevant evidence. See, 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 defendants' 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, 502 U.S. 46, 112 S.Ct. at 474; Christo, 614 F.2d at 492. The district court, however, also failed to take this step. 35 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; United 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.