Opinion ID: 501896
Heading Depth: 3
Heading Rank: 1

Heading: Salespersons

Text: 22 As discussed earlier, a scheme to defraud GIC customers is apparent in the record. GIC faced a serious cash flow problem arising out of the consent decree. To solve the problem, Kilpatrick instructed his brokers to sell ZCTIs which he represented were backed by sufficient zero coupon bonds. Kilpatrick made the same representation to a government agent who was in GIC's Tampa office checking the company's compliance with the consent decree. Of course, the bonds did not come close to covering the investment instruments. Nothing in the record suggests that Kilpatrick was misled or innocently mistaken concerning the amount of bonds in the Olive Branch vault. Furthermore, Kilpatrick used the proceeds from ZCTI sales to meet the company's immediate financial obligations. From this evidence the jury is entitled, if not compelled, to infer a scheme to defraud GIC customers. 23 The record also clearly indicates that the mails were used to implement the scheme. Every sale mentioned in the indictment was made by phone. After a sale, the broker sent a confirmation notice to the customer, along with a brochure explaining the new investment. Since mailing confirmation notices or letters was an essential part of this scheme, use of the mail was sufficient to bring Kilpatrick's plan within the purview of 18 U.S.C. section 1341. Haimowitz, 725 F.2d at 1571. 24 The record below, however, fails to disclose a crucial element of the crime of mail fraud. Unless the appellants intended to defraud GIC customers, the convictions cannot stand. United States v. Kreimer, 609 F.2d 126, 128 (5th Cir.1980). We have already determined that the record does not show a conspiracy with Kilpatrick to defraud. If, however, appellants joined Kilpatrick's scheme after its inception, they have the criminal intent necessary for conviction under the statute. United States v. Toney, 598 F.2d 1349, 1356 (5th Cir.1979), cert. denied, 444 U.S. 1033, 100 S.Ct. 706, 62 L.Ed.2d 670 (1980). The only evidence in the record even remotely suggesting that the salespersons intentionally joined Kilpatrick's scheme is their enormous success at selling ZCTIs. Unindicted in this case are six other GIC salespersons who accounted for 16% of the total ZCTIs sold. The government argues that the appellant salespersons' success as compared to the other brokers was necessarily accomplished by misrepresentations arising out of Kilpatrick's overall scheme. We find that this evidence alone cannot remove all reasonable doubt as to whether the salespersons joined Kilpatrick's plan. The government fails to consider other criteria that may account for the salespersons' success, such as personal skills or motivation. Furthermore, the record contains no evidence that the salespersons at any time discovered or learned of the empty vault in Olive Branch. Without more, the government fails to establish beyond a reasonable doubt that the salespersons joined Kilpatrick's scheme and thus possessed the intent to defraud. 25 The government argues, however, that the failure to check the Olive Branch vault represents a reckless disregard of the truth satisfying the intent element of this crime. See Sawyer, 799 F.2d at 1502; United States v. Frick, 588 F.2d 531, 536 (5th Cir.), cert. denied, 441 U.S. 913, 99 S.Ct. 2013, 60 L.Ed.2d 385 (1979). The government's argument would have merit if the salespersons were under a duty to investigate the backing of the securities they were selling. Nothing in the record suggests such a duty. Common sense dictates that a securities broker cannot be expected to travel to the company vault to make sure his superiors have acquired sufficient collateral to back each investment sold. 4 26 Finally, the government intimates that the success at selling ZCTIs is attributed to personal misrepresentations apart from Kilpatrick's overall scheme. 5 In its brief, the government argues that even if appellants truly were unaware of the absence of ZCTI collateral, it does not follow that their representations to investors were not fraudulent. The government contends that the appellants represented not merely that the ZCTIs were backed by federally insured bonds, but were themselves so insured. Such a representation, the government contends, is fraudulent regardless of whether sufficient zero coupon bonds exist to collateralize the instruments. Only the zero coupon bonds themselves are actually government insured. Thus, any short term investment that is backed by zero coupon bonds is a step removed from actual government insurance. The only party liable on the ZCTIs is GIC, not the federal government. Consequently, the government contends, the ZCTI is much more risky than investments directly insured by the government. Since ZCTIs are a step removed from direct government insurance, they are, in the government's words, only as good as the company issuing them. 27 The government's argument is persuasive, but unsupported by the evidence. The record reveals that both appellants Brown and Gruber told their customers that the ZCTIs were safe investments that were backed by the government, but not that the investment was government insured. Similarly, the record shows that appellant Parker told his customers that ZCTIs were safe investments which were backed by the government and that the customers had nothing to worry about. The record does not show that Parker represented the ZCTIs as government insured. Finally, the record shows that appellant Anderson told her clients that the instruments in question were good investments which were backed by the government, but not that the instruments were directly insured by the government. In sum, the record below does not show that the appellant salespersons represented to any person named in the indictment that ZCTIs were government insured. 28 In oral argument before this court, however, the government strayed from the position taken in its brief. After arguing that the heart of the fraud in this case stems from the representation that ZCTIs were insured by the government when they were merely backed by government bonds, counsel for the government stated: If you say this security is backed by the government, you're saying this security is insured by the United States. There seems to be some confusion in the record, in the government's brief, and in oral argument as to whether backed or insured by the government is a misrepresentation when describing ZCTIs. In oral argument the government eventually, and not surprisingly, took the position that both representations were fraudulent. We disagree. The representation that the instruments in question were backed by the government does not supply the criminal intent necessary to uphold appellants' convictions under these circumstances. Assuming the ZCTIs were fully collateralized by zero coupon bonds, as represented to the salespersons, the instruments could reasonably be characterized as government backed securities. Whatever may happen to the issuing company, a customer could always fall back on the zero coupon bonds to recover his investment. 29 Indeed, the government's own witnesses testified that, had the ZCTIs been fully collateralized, they would have been perfectly legal. On cross-examination, Simon Canasi, a securities broker testifying as an expert for the government, said that an investment is as safe as the United States Government as long as [the] instrument is held in the customer's name and that investment is collateralized by U.S. Government securities. On direct examination, Mr. Canasi expressed concern over a broker who retains collateral on investments. Canasi testified that, if a brokerage house keeps the collateral securing an investment, then the investment is only as safe as the brokerage house itself. Canasi made clear, however, that as long as a firm maintained sufficient security for their investments, the operation would be legal. Similarly, William Reilly of Florida's Bureau of Securities Dealers Examinations testified that ZCTIs were perfectly legal as long as GIC maintained sufficient zero coupon bonds to secure the investments. This testimony makes clear that the fraud in the instant case was not representing ZCTIs as government backed, but rather failing to secure and maintain sufficient backing for the ZCTIs. 30 Perhaps a better description of the ZCTIs is an investment collateralized by government bonds or backed by government backed bonds. While appellants may have been somewhat loose with their description of the instruments, we find that the characterization of ZCTIs as government backed is not wholly unfounded and, under the facts of this case, certainly is not criminal. Therefore, we reverse appellants' convictions on the mail fraud counts. We do not pass upon whether the characterization of ZCTIs as government insured might amount to fraud since there is no evidence in the record that the salespersons made such representations.