101 F.3d 375 (5th Cir. 1996), 95-40820, United States v. Peterson

Docket Nº:95-40820.
Citation:101 F.3d 375
Party Name:UNITED STATES of America, Plaintiff-Appellee, v. J. Chandler PETERSON, Defendant-Appellant.
Case Date:November 27, 1996
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 375

101 F.3d 375 (5th Cir. 1996)

UNITED STATES of America, Plaintiff-Appellee,

v.

J. Chandler PETERSON, Defendant-Appellant.

No. 95-40820.

United States Court of Appeals, Fifth Circuit

November 27, 1996

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        Tom N. Kiehnhoff, Office of the U.S. Atty, Beaumont, TX, John Malcolm Bales, Asst. U.S. Atty, Lufkin, TX, for plaintiff-appellee.

        G. Patrick Black, Office of the Federal Public Defender, Tyler, TX, for defendant-appellant.

        Appeal from the United States District Court for the Eastern District of Texas.

        Before DAVIS and DENNIS, Circuit Judges, and FALLON 1, District Judge.

        FALLON, District Judge:

        On May 9, 1995, a jury convicted J. Chandler Peterson of violating SEC Rule 10b-5 in connection with a sale of securities to the Pipefitters Local No. 195 Pension Trust Fund in Nederland, Texas. See 15 U.S.C. § 78(b); 17 C.F.R. § 240.10b-5. The defendant has appealed his conviction alleging that the evidence presented by the Government was insufficient to support a judgment of conviction and that the trial count improperly instructed the jury on good faith and reliance on counsel. In the alternative, the appellant contends the trial court improperly calculated his offense level under the United States Sentencing Guidelines by finding that the total amount of loss attributable to the defendant's conduct was $1,413,142.00. For the following reasons, we affirm the defendant's conviction and vacate the sentence imposed and remand this matter for re-sentencing.

        I

        FACTS AND PROCEEDINGS

        J. Chandler Peterson was an entrepreneur on a grand scale. One of Peterson's major financial enterprises was American Business Funds, Ltd. 1983 (ABFL) which was formed as a Limited Partnership in October 1983. The stated purpose of ABFL was to invest in leveraged buyouts, venture capital entities, and other "investments to achieve capital gains." The general partners of ABFL were Phoenix Management Corporation (Phoenix), in which Peterson was the principal shareholder and chairman of the board of directors, and Peterson in his individual capacity. 2 Thus, Peterson was solely responsible for ABFL's Discretionary Investment Fund, the monitoring of investments and cash distributions to the limited partners.

        In May of 1984, Miguel Duenas became a limited partner in ABFL by purchasing six "units" at $150,000 per unit for a total investment of $900,000. By 1987 Duenas was unhappy with Peterson's handling of the ABFL. Specifically, Duenas contended that Peterson had failed to make distributions to the limited partners per the partnership agreement contained in the Private Placement Memorandum. 3 Initially, Duenas sought to have Peterson distribute investment returns through amicable means. This method failed and on May 24, 1988 Duenas filed a civil complaint in state court in Dade County, Florida against Peterson, Phoenix, and the ABFL. The complaint was personally served on Peterson on May 26, 1988.

        The Duenas complaint lies at the heart of this case. In the complaint Duenas stated

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the terms and conditions which he felt governed the ABFL along with the alleged violations of the partnership agreement which Duenas claimed had occurred. Specifically, the Duenas' complaint asserted that Peterson had breached his legal and fiduciary duties to ABFL's limited partners. According to Duenas Peterson (1) loaned ABFL funds to himself and others for the purchase of an Arizona bank, (2) paid himself $700,000 from ABFL funds in connection with "acquisition financing" of another company, and (3) refused to distribute the returns of partnership investments as required by the limited partnership agreement. Duenas based this third claim on a 1983 amendment to the ABFL limited partnership agreement. This amendment was contained in the ABFL Private Placement Memorandum Duenas received upon purchasing his ABFL interest. The provision, as interpreted by Duenas, required that Peterson access ABFL's cash position every six months and distribute within sixty days any reserves not necessary for payment of expenses or other indebtedness. According to Duenas, "reinvestment" did not qualify as an expense or debt.

        In addition to damages, Duenas sought a declaratory judgment affirming that the limited partnership agreement required ABFL's general partners, Peterson and his company, to distribute returns rather than reinvest them. Furthermore, Duenas contended in two counts--one on his behalf and one on behalf of the ABFL--that Peterson committed a breach of fiduciary duty not limited to the duty to deal with Duenas and the ABFL's property "honestly and in strictest good faith." In short, the Duenas suit alleged that Peterson had managed ABFL improperly and, thereby, breached his fiduciary duty.

        The Duenas suit placed Peterson in a very awkward position: a major investor in ABFL wanted out, had made serious allegations of wrong doing, and had exposed him to possibly large financial losses.

        It was at this point that the Pipe Fitters Local 195 Pension Trust Fund (Local 195) entered the picture. During the early part of May 1988 two trustees of Local 195 attended a workshop on investment in Dallas, Texas which was presented by J. Chandler Peterson. Peterson apparently impressed the trustees and was asked to make a presentation to the entire board.

        On June 2, 1988, Peterson traveled to Nederland, Texas to make his pitch to the Local 195 Board of Trustees. During Peterson's presentation to Local 195, he convinced the fund trustees to purchase almost $1 million worth of limited partnership "units" in the ABFL. He described the ABFL deal as a "limited window of opportunity" to obtain "windfall profits." In the near future, he explained, ABFL would receive a substantial return from an investment in an ammunition company called Federal Cartridge. Therefore, he advised the board that they would receive a distribution of $100,000 in sixty to ninety days of their initial million dollar investment. Peterson also stated that the opportunity had arisen because a current limited partner was in need of cash. On June 2, 1988, the same day Peterson made his presentation to the pension trustees, they voted to invest in ABFL. Before the meeting, according to Peterson he met with the union's manager, Mack Roberts, at which time he claims he disclosed the pending lawsuit and asked Robert's how to handle the lawsuit with the board. Roberts allegedly told Peterson he, Roberts, would "handle it." At trial Roberts denied that this conversation ever took place. The jury in the instant matter believed Roberts and not Peterson. The jury concluded Peterson never disclosed to the trustees the existence of the Duenas lawsuit.

        After receiving the million dollar payment from Local 195 Peterson paid Duenas $940,000 for his "units" and transferred those "units" to Local 195. At this point the Duenas lawsuit was settled and dismissed. On July 7 and again on August 4, the trustees were informed that their investment had already yielded approximately $100,000 in returns which they would receive on September 1. On September 28, however, they received only $45,558 which fell far short of the promised $100,000. Peterson explained that the general partner had elected to reinvest the balance at this time. No funds were distributed by Peterson in 1989. By

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the middle of 1989 Peterson had been removed as the head of ABFL and the company placed in receivership as a result of a Georgia lawsuit by unhappy ABFL investors.

        At trial the United States contended that Peterson convinced union trustees to invest in ABFL through knowing misrepresentations and omissions of material fact in violation of Title 15, United States Code §§ 78j(b) and 78ff and Rule 10b-5 (17 C.F.R. § 240.10b-5) (commonly referred to as a Rule 10b-5 violation). It was the governments position that Peterson's failure to inform the trustees of the Duenas suit constituted a "material" omission. According to the United States, would-be investors would be adversely influenced by a suit "challenging [Peterson's] honesty" in deciding whether to purchase units of ABFL. Additionally, the Government also argued that Peterson knowingly misrepresented the amount of the "windfall returns" the pension would receive. Moreover, according to the government, Peterson lied when he told the trustees that the ABFL units were available because their current owner needed cash. In fact, the limited partner he was referring to was Miguel Duenas who, as explained above, had recently filed suit in Dade County, Florida against Peterson and Phoenix, the general partners in ABFL. The cash was in fact needed to settle the Duenas suit.

        At trial a jury concluded that the United States' position was supported by the evidence and found Peterson guilty of securities fraud.

        II

        ANALYSIS

  1. Sufficiency of the evidence.

            Under 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5, the Government must prove that the defendant:

    (1) knowingly and willfully, (2) through use of the instrumentalities of commerce and the mails and (3) in connection with the purchase or sale of a security, (4) used manipulative and deceptive devices in violation of Rule 10b-5 by (a) employing any device, scheme, or artifice to defraud, (b) making any untrue statement of material fact or omitting to state a material fact necessary in order to make the statement, under the circumstances, not misleading, or engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit.

            Peterson contends that the United States did not introduce sufficient evidence of the last element concerning manipulation and deception by making an untrue statement of material fact or omitting to state a material fact. The defendant...

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