U.S. v. Monus

• Decision Date: 20 February 1998
• Docket Number: No. 95-4326,95-4326
• Parties: -7329, 98-2 USTC P 50,488, 48 Fed. R. Evid. Serv. 224 UNITED STATES of America, Plaintiff-Appellee, v. Michael I. MONUS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 376

128 F.3d 376

80 A.F.T.R.2d 97-7329, 98-2 USTC P 50,488,

48 Fed. R. Evid. Serv. 224

UNITED STATES of America, Plaintiff-Appellee, v. Michael I. MONUS, Defendant-Appellant.

No. 95-4326.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 8, 1997.

Decided Oct. 21, 1997.

Rehearing Denied Feb. 20, 1998.

Peter D. Goldberger (argued and briefed), Law Office of Peter Goldberger, Ardmore, PA, Ramsey Clark (argued and briefed), New York City, for Plaintiff-Appellant.

John D. Sammon (argued and briefed), James V. Moroney (argued), Office of the U.S. Attorney, Cleveland, OH, for Defendant-Appellee.

Before: KENNEDY, GUY, and SILER, Circuit Judges.

OPINION

KENNEDY, Circuit Judge.

Defendant Michael Monus was convicted on all counts of a 109 count indictment that charged him with conspiracy to commit mail fraud, wire fraud, bank fraud, and transportation of funds obtained by theft or fraud under 18 U.S.C. § 371 (count one); with bank fraud under 18 U.S.C. § 1344 (counts two and three); with wire fraud under 18 U.S.C. § 1343 (counts four, five, eight, ninety-one, and ninety-two); with mail fraud under 18 U.S.C. § 1341 (counts six and seven); with interstate transportation of property obtained by theft or fraud under 18 U.S.C. § 2314 (counts nine through ninety, and ninety-three through 106); with filing false income tax returns under 26 U.S.C. § 7206(1) (counts 107 and 108); and with obstruction of justice under 18 U.S.C. § 1503 (count 109). Defendant raises several assignments of error. For the following reasons, we affirm defendant's convictions on all counts, vacate his sentence, and remand to the District Court for sentencing consistent with this opinion.

I. Facts

Defendant was the President and Chief Operating Officer of Phar-Mor, Inc. ("Phar-Mor"), a retail discount drugstore chain based in Youngstown, Ohio. David Shapira was the Chief Executive Officer of Phar-Mor, as well as being Chief Executive Officer of Giant Eagle, Phar-Mor's parent company and majority stockholder. Giant Eagle also owned, Tamco, Inc. ("Tamco"), which was one of Phar-Mor's major suppliers. Phar-Mor opened its first store in 1982 and expanded rapidly over the next decade. By 1988, it had opened eighty-one stores and had over one half of a billion dollars in annual sales. By July 1992, it had more than 300 stores located in thirty states and had gross revenues of $2.8 billion. Phar-Mor, however, began to experience financial difficulties in January of 1988. Initially, the most serious problem was a one to two percent decline in Phar-Mor's gross margin. ¹ An investigation into the causes of this decline revealed that Tamco was shipping less merchandise than it was billing Phar-Mor. After this deficiency was discovered, Giant Eagle agreed to pay Phar-Mor seven million dollars on behalf of Tamco in mid-1988. Phar-Mor later bought Tamco from Giant Eagle in an additional effort to solve the inventory and billing problems. The monetary settlement with Giant Eagle and Tamco did not halt the decline in Phar-Mor's gross margin. The accounting department, headed by Patrick Finn, Phar-Mor's Chief Financial Officer, created weekly reports indicating the company's gross margin results. In early 1989, Finn showed defendant reports revealing that the gross margin remained disappointing. Defendant instructed Finn not to report the actual gross margin to the board of directors or to Shapira. At this point, defendant apparently was concerned that Giant Eagle would demand repayment of some of the seven million dollar settlement if it discovered that Tamco was not responsible for all of Phar-Mor's problems. According to Finn's testimony, defendant decided to alter the company's gross margin figures, inflating them to match historically expected margins, thereby understating losses and reflecting nonexistent profits.

Defendant continued to alter the weekly gross margin reports himself for a period of several months. He then instructed Finn to carry out the alterations himself. As soon as defendant and Finn started to alter the gross margin reports, they began to generate two sets of weekly financial reports--one containing the false, altered numbers and another containing the real numbers. The difference between the real and falsified figures were tallied in a separate account called the "bucket" or "subledger." The falsified reports understated liabilities and overstated earnings, and the subledger contained net losses. Because defendant and Finn distributed the false financial report to David Shapira and the Giant Eagle board of directors, it became known as the David Report.

Defendant and Finn also submitted these false financial statements to Pittsburgh National Bank, which increased a revolving credit line for Phar-Mor from $435 million to $600 million in March 1992; to Corporate Partners, an investment group that bought $200 million in Phar-Mor stock in June 1991; to Chemical Bank, which served as the placing agent for $155 million in ten-year senior secured notes issued by Phar-Mor; to Westinghouse Credit Corporation, which had executed a $50 million loan commitment to Phar-Mor in 1987; and to National Westminster Bank, which served as the placing agent for $112 million in Phar-Mor stock sold to various financial institutions in the fall of 1991. The submission of these fraudulent statements to these financial institutions formed the basis for the bank fraud, wire fraud, and mail fraud counts of defendant's indictment.

Defendant and Finn had to come up with a way to conceal the losses contained in the subledger. In the beginning, defendant instructed Finn to offset losses in the subledger with "exclusivity funds"--large payments that suppliers made to Phar-Mor for the exclusive right to supply its stores with particular types of merchandise for a number of years. At the end of the fiscal year 1989, defendant and Finn had offset all the losses in the subledger in this manner. The David Reports, however, were still materially false, because the handling of the exclusivity money understated liabilities and overstated income. ² According to Finn, defendant and he now feared that they would lose their jobs if the falsification were uncovered.

In fiscal year 1990, defendant and Finn hid other items in the subledger. For example, Phar-Mor had a joint advertising plan with some of its suppliers, which it called the "Power Plan." In 1990, when the Power Plan generated less income than was expected, the falsified financial statements reported the expected income and the shortfall went in the subledger. Defendant and Finn treated shortfalls in merchandise rebates from suppliers in the same manner. In addition, the subledger included unauthorized payments to the World Basketball League ("WBL"), a financially troubled professional sports league, in which defendant had invested heavily and of which, he was the majority owner. Defendant initially told Finn that he would repay the money with corporate sponsorships for the WBL that Phar-Mor buyers would solicit from suppliers. Payments from Phar-Mor to the WBL totaled $5.5 million in fiscal year 1991 and ultimately totaled approximately $8.8 million before this scheme was discovered. Over the course of 1990 and 1991, the subledger also concealed $568,000 in unauthorized Phar-Mor checks written to defendant or for his direct benefit.

By June 30, 1990, the subledger contained concealed losses at Phar-Mor totaling $38.5 million. In order to hide these losses from year-end auditors, defendant and Finn added $200,000 to the inventory account of each store that they knew would not be audited. For the time being they escaped detection. One year later, the subledger had grown to $148 million. Finn testified that he regularly discussed the size of the subledger with defendant. Jeffrey Walley, the vice-president of Phar-Mor, testified that from July 1990 to July 1991 he discussed the company's concealed losses with Finn and defendant between five and ten times.

In the fall of 1991, Stan Cherelstein became Phar-Mor's controller. John Anderson, the accountant at Phar-Mor who began preparing the subledger report in early fiscal year 1990, informed Cherelstein of the subledger. Cherelstein immediately objected to the existence of the subledger and demanded a meeting with defendant. In December 1991, defendant, Finn, Cherelstein, and Anderson held a meeting, where they discussed the losses and the payments to the WBL that had been concealed in the subledger. At this time, the subledger contained approximately $150 million, including almost $9 million in checks written to the WBL. At this meeting, defendant acknowledged his debt to Phar-Mor for the payments to the WBL and indicated that he would repay the company.

The size of the subledger continued to increase, even after this December 1991 meeting. As a result, Cherelstein demanded a second meeting in April 1992. Defendant, Finn, Anderson, Walley, and Cherelstein attended. Cherelstein secretly tape-recorded the meeting; the recording was played for the jury at defendant's trial and introduced as evidence.

In July 1992, Finn voluntarily exposed this fraudulent scheme to the United States Attorney in Cleveland, Ohio. Finn and Walley ultimately pleaded guilty to various charges. Defendant was first indicted in January 1993 on 129 counts of fraud, money laundering, and conspiracy. The case went to trial but resulted in a mistrial. On July 21, 1994, a 109-count superseding indictment was returned against defendant. Following a jury trial that lasted one month, defendant was convicted on all counts. The court imposed a sentence of 235 months imprisonment and a fine of one million dollars.

II. Discussion

On appeal, defendant argues that numerous errors at trial require a judgment of acquittal on count 109, reversal of his convictions on all counts, or in the alternative, vacation of his sentence and a remand to the District Court for re-sentencing. In...