Opinion ID: 217197
Heading Depth: 2
Heading Rank: 1

Heading: Embezzlement or Conversion of the Elective Deferrals

Text: Defendants were convicted under 18 U.S.C. § 664 for embezzling or converting the Plan's assets in December 2002 and March 2003. Section 664 provides: Any person who embezzles, steals, or unlawfully and willfully abstracts or converts to his own use or to the use of another, any of the moneys, funds, securities, premiums, credits, property, or other assets of any employee welfare benefit plan or employee pension benefit plan, or of any fund connected therewith, shall be fined under this title, or imprisoned not more than five years, or both. As used in this section, the term any employee welfare benefit plan or employee pension benefit plan means any employee benefit plan subject to any provision of title I of the Employee Retirement Income Security Act of 1974. 18 U.S.C. § 664. We have held that the operative terms embezzles and converts are to be given their common-law meanings. United States v. Andreen, 628 F.2d 1236, 1241 (9th Cir.1980); Woxberg v. United States, 329 F.2d 284, 290 (9th Cir. 1964). Thus, [e]mbezzlement is the fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. Woxberg, 329 F.2d at 290; see also Andreen, 628 F.2d at 1241 (citing United States v. Dupee, 569 F.2d 1061, 1064 (9th Cir.1978)). Conversion encompasses the use of property, placed in one's custody for a limited purpose, in an unauthorized manner or to an unauthorized extent. Andreen, 628 F.2d at 1241 (citing Morissette v. United States, 342 U.S. 246, 272, 72 S.Ct. 240, 96 L.Ed. 288 (1952)). We have also recognized that § 664 does more than recapitulate common-law offenses. Because § 664 and other pension-protection laws, see, e.g., 29 U.S.C. § 501(c) (prohibiting embezzlement from a labor organization fund), are aimed at preserv[ing] welfare and pension funds for the protection of those entitled to their benefits, we have held that § 664 imposes liability for a broad class of unauthorized acts willfully committed by those in a fiduciary or advisory capacity. See Andreen, 628 F.2d at 1241, 1242 (examining the legislative history of 29 U.S.C. § 501, 18 U.S.C. § 664). As then-Judge Kennedy explained: The essence of the crime is theft and in the context of union funds or pension plans the offense includes a taking or appropriation that is unauthorized, if accomplished with specific criminal intent. In this respect lack of authorization may be shown if the diversion is substantially inconsistent with the fiduciary purposes and objectives of the union funds or pension plan, as set forth by statutes, bylaws, charters, or trust documents which govern uses of the funds in question. Whatever imprecision attends this definition is remedied substantially by the requirement of scienter, which is an essential element of the crime. The act to be criminal must be willful, which means an act done with a fraudulent intent or a bad purpose or an evil motive. Id. at 1241 (emphasis added) (citation omitted). We have consistently declined invitations to engraft additional elements onto, or create affirmative defenses for, § 664 violations. In Andreen, we rejected the participant benefit theory by holding that so long as a fiduciary used plan assets in an unauthorized manner, the lack of benefit to the [plan beneficiaries] is not an element of the offense required to be shown as part of the prosecution's case. Id. at 1242. Likewise, the conferring of any benefit in such a case is not a defense, except insofar as it may bear upon the defendant's state of mind in committing the acts in question. Id. at 1242-43. We thus rejected the appeal of an attorney who had assisted the trustees of a pension plan in drafting an unauthorized compensation plan that rewarded the trustees for merely executing their fiduciary duties. Id. at 1245-46. We reasoned that the attorney's attendance at trustee meetings where the compensation plan was discussed, coupled with his knowledge that the plan was unauthorized, was sufficient to show that he aided and abetted a violation of § 664. Id. at 1246. In United States v. Ford, a companion case to Andreen, we affirmed the convictions of the trustees whom Andreen had assisted. 632 F.2d 1354 (9th Cir.1980), overruled on other grounds, as recognized in United States v. Miller, 874 F.2d 1255, 1268 (9th Cir.1989). In reviewing a sufficiency-of-the-evidence challenge, we highlighted repeatedly certain circumstantial facts that showed the trustees' awareness that their behavior was not authorized by the trusts' beneficiariesprimarily that the trustees were offering themselves benefits from the trust at a lower cost than was available to beneficiaries. Id. at 1366, 1367 n. 12, 1368. In two related appeals, United States v. Mett, 178 F.3d 1058 (9th Cir.1999), and United States v. Wiseman, 274 F.3d 1235 (9th Cir.2001), we again disavowed a participant-benefit defense and further held that ERISA-plan fiduciaries could not be implicitly authorized to use assets in a manner that jeopardizes their availability for the beneficiaries. Mett, 178 F.3d at 1067-68. Mett and Wiseman were separate appeals of the same underlying prosecution against two executives of an art gallery who withdrew $1.6 million from a pension plan to finance their floundering enterprise. Id. at 1060-61. Mett, the gallery's president, and Wiseman, the vice-president, served as the trustees of two pension benefit plans. Id. at 1060. After being indicted for felony art fraud, their gallery fell on hard times, and the trustees withdrew money from pension plans and deposited it into the company's general operating account without informing the employees-beneficiaries. Id. at 1060-61. While Mett and Wiseman admitted making the withdrawals, they sought to avoid liability by characterizing their appropriations as implicitly authorized loans necessary for the business to survive. Id. at 1060. This implied authorization was founded on the premise that, because the gallery would have had to be closed and the employee-beneficiaries would otherwise have been laid off and faced with unemployment, id., the acts were not criminal. We rejected the implied authorization defense based on a fiduciary's purported intention to serve the broader interests of employee welfare. Id. at 1067. Because ERISA funds are protected so that they will be available at retirementand are therefore subject to numerous non-alienation restrictionswe observed that an authorization argument was illogical. After all, if the beneficiaries themselves are not at liberty to dispose of the funds for a purpose other than retirement, they could not lawfully authorize someone else to do it for them. Id. at 1068 ([I]t is little different from arguing that complete strangers `authorized' the illicit transactions.). Following retrial in light of other errors, the Mett defendants returned to us in United States v. Wiseman , claiming that the district court had committed new errors by not giving a mistake-of-law instruction or an instruction that the government had to show the defendants were not borrowing from the pension. 274 F.3d at 1241. We rejected both contentions. With respect to the mistake-of-law argument, we held that, although `the defendant must knowingly act wrongfully to deprive another of property,' there is no requirement that the defendant also know his conduct was illegal. Id. at 1240 (alterations and internal quotation marks omitted). We likewise rejected the gallery executives' borrowing-from-the-pension-fund defense. Id. at 1241. We stated that evidence of borrowing, or for that matter evidence of intent to repay, is relevant to criminal intent, but that [i]ntent to repay generally is not a defense to embezzlement. . . [or] conversion. Id. (citing United States v. Ross, 206 F.3d 896, 899 (9th Cir. 2000)); see also United States v. Thordarson, 646 F.2d 1323, 1335 n. 22 (9th Cir. 1981).
The jury convicted Defendants of two § 664 crimes: Counts 17 and 18. Count 17 concerned $1,192.40 of employee elective deferrals withheld in December 2002. Count 18 involved $1,000.40 in deferrals from March 2003. The district court gave the same jury instruction for both of these counts, requiring proof beyond a reasonable doubt that: First, the Lunde Electric Company 401(k) Plan was established or maintained as an employee pension benefit plan subject to Title I of the [ERISA]; and Second, the defendant either: (a) embezzled or stole funds of the plan; or (b) unlawfully and willfully abstracted or converted funds of the plan to his own use or the use of another[.] The district court defined embezzled, stole, converted, and abstracted. Defendants contend that there was insufficient evidence to support these elements. Evidence is sufficient for conviction if, viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt. United States v. Bush, 626 F.3d 527, 533 (9th Cir.2010) (internal quotation marks omitted). In a mid-trial motion for a directed verdict, Defendants asserted that the government had not established the existence of the Plan and thus claimed that any deferrals withheld were actually discretionary employer contributions. This argument was not renewed in Defendants' post-trial Fed.R.Crim.P. 29 motion. Defendants also assert that the failure to remit elective deferrals within the time frame established by the DOL's Plan Asset Regulation, 29 C.F.R. § 2510.3-102(b)(1), is not tantamount to embezzlement or conversion and that the government's references to the Plan Asset Regulation were prejudicial. Because Defendants' Rule 29 motion regarding Counts 17 and 18 was limited to an argument about mens rea, our review is for plain error. United States v. Alvarez-Valenzuela, 231 F.3d 1198, 1200-01 (9th Cir.2000) ([W]e interpret Rule 29(a) to suggest that failure to renew the motion at the end of trial does not mean that it has been waived, but only that a higher standard of review is to be imposed. [We] may review an unrenewed motion for judgment of acquittal, but only to prevent a manifest miscarriage of justice, or for plain error.).
Defendants assert that there was insufficient proof that the Plan contained a 401(k) feature. They argue that all ERISA plans contain an amendment procedure and that [t]hese . . . procedures, once set forth in a benefit plan, constrain the employer from amending the plan by other means. Winterrowd v. Am. Gen. Annuity Ins. Co., 321 F.3d 933, 937 (9th Cir.2003) (citing Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 85, 115 S.Ct. 1223, 131 L.Ed.2d 94 (1995)). According to Defendants' theory, the government had to introduce a properly executed version of the 1995 Amendment. Because the government does not have such a document, Defendants argue, the elective deferrals were actually discretionary employer contributions that do not become Plan Assets until they are remitted to the Plan. Defendants' argument regarding the validity of the 1995 Amendment is a red herring. Defendants were convicted only for their failure to remit deferrals after the 2002 Restatement. Even though the Form 5500s submitted to the IRS by Lunde Electric, the testimony of Brad Sommerfeld, and the email by attorney Braley all indicated that the 401(k) Plan existed before 2002, because Counts 17 and 18 concerned conduct that occurred after the 2002 Plan Restatement, we need only consider that document. The Eriksens do not dispute that the 1991 Plan was governed by Title I of ERISA, but contend that the evidence did not allow the conclusion that the Plan was thereafter amended or restated. Generally, whether a plan is subject to Title I of ERISA is an issue of fact to be decided by the jury, guided by applicable legal principles. United States v. Wofford, 560 F.3d 341, 347 (5th Cir.2009) (citing United States v. Helbling, 209 F.3d 226, 239 (3d Cir.2000)). The amendment procedures for any ERISA benefit plan must be specified by the employer and identify the persons with the authority to amend. Winterrowd, 321 F.3d at 937 (citing 29 U.S.C. § 1102(b)(3)). Here, the 1991 Plan, at Section 10.6, specified that amending the Plan shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary. To show such an amendment occurred by at least 2002, the government introduced a written copy of the 2002 Restatement, which included a 401(k) provision and was signed by Raymond as Employer and Trustee and by Sigmund as Trustee. The government also introduced addenda referring to the effective date of the Restatement as January 1, 2002, as well as a Consent to Corporate Action by Lunde Electric that approved the amended 401(k) Profit Sharing Plan. . . effective January 1, 2002. Any of these documents alone was competent evidence to allow the jury to conclude that the Plan had been restated in 2002 with a 401(k) plan. Accordingly, there was sufficient evidence for the jury to conclude that the 1991 Plan had been restated before the Eriksens retained their employees' elective deferrals in the Company's general account.
The second element of § 664 requires the jury to find that a defendant willfully embezzled, converted, or misappropriated the funds of a pension plan. Andreen, 628 F.2d at 1241. Defendants concede that the funds were not remitted to the Plan Account before the DOL investigation. However, they contend that their keeping elective deferrals for longer than fifteen daysa deadline specified in the Plan Asset Regulationis not tantamount to embezzlement or conversion. According to Defendants, the government, by referencing the Plan Asset Regulation, misled the jury into concluding otherwise. In support of their argument, Defendants ask us to consider the holdings of United States v. Christo, 614 F.2d 486 (5th Cir.1980), and United States v. Wolf, 820 F.2d 1499 (9th Cir.1987). Although both Christo and Wolf address the dangers of bootstrapping a civil violation into a criminal one, neither case concerns § 664 crimes, nor do their holdings apply here. Both Christo and Wolf concerned prosecutions against bank executives for misapplication of bank funds, in violation of 18 U.S.C. § 656. Wolf, 820 F.2d at 1501; Christo, 614 F.2d at 489. In Christo, the misapplication charge was based on a bank officer's repeatedly overdrawing his checking account. At the time, 12 U.S.C. § 375a prohibited a bank from extending a loan of more than $5,000 to one of its officers. Christo, 614 F.2d at 488 n. 2, 490. The trial court quoted § 375a to the jury and further instructed the jury that it could consider violations of § 375a in connection with the criminal misapplication charges. Id. at 491. The Fifth Circuit reversed the defendant's misapplication conviction, observing: A conviction, resulting from the government's attempt to bootstrap a series of checking account overdrafts, a civil regulatory violation, into an equal amount of misapplication felonies, cannot be allowed to stand. The government's evidence and argument concerning violations of § 375a impermissibly infected the very purpose for which the trial was being conducted. . . . Id. at 492. In Wolf, we relied on Christo to reverse convictions against a bank executive for misapplying bank funds and making false entries in a bank record. The executive had, among other acts, failed to disclose required information about the beneficiaries of his bank loans. Wolf, 820 F.2d at 1503. We faulted the government for basing its misapplication charges on a civil banking regulation that imposes a duty on bank employees to inform the bank's board of directors about the purpose of a loan. During Wolf's trial, the government's expert witness testified that the defendant's failure to disclose he was a beneficiary of some of the loans he disbursed violated Federal Reserve Regulation O (12 C.F.R. § 215). We held that the references to the Regulation were impermissible: Unlike references to [other civil violations which occurred during the trial], the references to Regulation O cannot be dismissed as being simply background information. The references were a key part of the government's case on the misapplication and false entry counts. . . . To supply the missing element of the false entry and misapplication charges, the government turned to Regulation O. Through its expert witness the government established that Regulation O imposed a duty on [the defendant] to inform the bank's directors that he had an interest in the loans. . . . In sum, the government used Regulation O to supply a crucial element of the misapplication and false entry charges. Id. at 1505 (emphasis added). Thus, under the logic of Christo and Wolf, it is impermissible to use the violation of a civil statute to ipso facto supply a crucial element of a criminal offense. Contrary to Christo and Wolf, the Plan Asset Regulation played an inconsequential or, more likely, no role in Defendants' convictions. Importantly, the Plan Asset Regulation does not create a reporting or other affirmative obligation on an employer nor does it prohibit certain behaviors under threat of civil sanction; rather, the regulation simply defines plan asset: the assets of the plan include amounts. . . that a participant or beneficiary pays to an employer. 29 C.F.R. § 2510.3-102(a)(1) (emphasis added). While one could selectively excerpt and rewrite portions of the regulation to create the appearance that it requires employers to remit their elective deferrals, the regulation does not create any such obligation. Indeed, the obligation not to use other people's money for purposes they have not authorized is traceable more fairly to antiquity than to the Plan Asset Regulation. Thus, contrary to the facts in Wolf, none of the elements of Counts 17 or 18 was established at trial, or could be established, by bootstrapping a violation of the regulation. Unlike in Christo, the regulation did not mislead the jury in its deliberations, as it was not even a factor for the jurors' consideration. The government did not contend that it was Defendants' failure to remit deferrals within fifteen days that constituted their crime. Rather, it was the fact that employee contributions were never remitted from January 1, 2002, until the DOL became involved, but were, instead, used to pay business expenses, as recounted by Brad Sommerfeld and others, that formed the factual and legal basis for the government's case. Conversion is a simple offense that encompasses the use of property, placed in one's custody for a limited purpose, in an unauthorized manner or to an unauthorized extent. Andreen, 628 F.2d at 1241. When Defendants commingled their employees' contributions with the Company's assets to prop up their failing business, they intentionally used their employee's assets for an unauthorized purpose. Moreover, they sent Participants account statements showing 401(k) balances which were, in fact, non-existent. Defendants' acts were substantially inconsistent with the fiduciary purposes and objectives of the union funds or pension plan, as set forth by statutes, bylaws, charters, or trust documents which govern uses of the funds in question. Id. As fiduciaries of the money given to them by their employees, Defendants were entrusted with custody of their employees' money for the sole purpose of remitting it to the 401(k) Plan; the Defendants' decision to deviate, be it to bet on horse races or pay other bills, is the wilful criminal misappropriation punished by § 664. Finally, Defendants' argument regarding the absence of intent is undercut by the evidence that both Defendants were alerted repeatedly about their obligation to remit the deferrals. Moreover, the government showed that Defendants hid their actions from employees by, for instance, withholding Statements of Net Assets in yearly investor reports. Accordingly, there was sufficient evidence to support Defendants' convictions on Counts 17 and 18.