Opinion ID: 217197
Heading Depth: 4
Heading Rank: 2

Heading: Embezzlement, Conversion, or Unauthorized Use of Funds

Text: 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.