U.S. v. Masten, 97-3443

• Decision Date: 30 March 1999
• Docket Number: No. 97-3443,97-3443
• Citation: 170 F.3d 790
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Raymond J. MASTEN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 790

170 F.3d 790

UNITED STATES of America, Plaintiff-Appellee, v. Raymond J. MASTEN, Defendant-Appellant.

No. 97-3443.

United States Court of Appeals Seventh Circuit.

Argued April 21, 1998.

Decided March 30, 1999.

Darilynn J. Knauss, K. Tate Chambers (argued), Office of the United States Attorney, Peoria, IL, for Plaintiff-Appellee.

Marcia G. Shein, Richard D. Biggs (argued), Atlanta, GA, for Defendant-Appellant.

Before COFFEY, EASTERBROOK and EVANS, Circuit Judges.

COFFEY, Circuit Judge.

On October 25, 1995, a grand jury in the Central District of Illinois indicted defendant-appellant Raymond J. Masten for orchestrating a financial scheme designed to fraudulently induce others to invest money into his struggling company. On March 11, 1997, after a jury trial, Masten was convicted on three counts of mail fraud (18 U.S.C. § 1341) and two counts of money laundering (18 U.S.C. § 1956(a)(1)(A)(I)) and sentenced to a term of eighty-seven months of imprisonment followed by three years' supervised release. On appeal, Masten challenges the sufficiency of the evidence concerning the mail fraud count as well as his conviction for money laundering. We affirm.

I. BACKGROUND

In January 1989, five individuals founded Softron International, Inc., in Chino, California, to market a water conditioning device. ¹ The founders determined that sales would be made by distributors. In order to become a distributor, interested individuals paid a joining fee to the founders and earned commissions through the sales of the company's products. As an additional means of earning income, distributors could recruit others into the sales force and thus would be eligible to earn a partial commission for each sale the recruits made. Those distributors who were successful in bringing new recruits into the organization were said to have a "downline." ²

The defendant-appellant Masten, though not one of the five founders, became a Softron distributor in autumn 1989 and commenced recruiting new members into his "downline." As of December 1990, Masten had assembled the largest downline, and was generating the largest income, of any distributor. At the end of 1990 Softron was in dire financial straits, unable to meet its tax burden, much less pay commissions to distributors. The company also fell behind on payments to suppliers, and the firm's liabilities mounted until, in the month of March 1991, the company's financial statement reflected a negative net worth of $650,000. Masten claims that he was not aware of the extent of the company's financial difficulties until June 17, 1991, when he was invited to sit in on a board meeting. The directors at that meeting offered him the position of chairman of the board of Softron, and he accepted, in spite of the fact that until then he had not played any part in the company's management.

                After reviewing the company's balance sheet, Masten felt that unless $700,000 in emergency funds were raised within seven days, Softron might be forced to cease operations.  With the approval of the board of directors, he sought to raise the emergency capital from the distributors in his downline. 3  With the assistance of two venture capitalists named Charles Whitlock and Michael Dodak, 4 Masten organized a general partnership, called the Softron Distributorship Investment Group ("SDI"), in order to raise the emergency capital.  Whitlock, Dodak and Masten agreed that after raising the sum of $700,000, the general partnership would use $250,000 of this money to purchase 30% ownership in Softron.  The balance would be lent to Softron, collateralized by Softron's assets
                

Following the board meeting, Masten informed a number of distributors of the creation of the SDI partnership. Those distributors who expressed interest in SDI were sent a "fact sheet" to convince them to invest in SDI. This document contained statements that were at odds with the arrangement Masten had made with Dodak and Whitlock. For instance, the sheet, after explaining that SDI was in the process of raising $700,000 through the sale of thirty-five partnership units at $20,000 apiece, stated that all of the money would be used to purchase Softron stock. This proposal contradicted the arrangement Dodak, Whitlock and Masten had settled upon; their agreement had provided that only $250,000 of the $700,000 would be used to purchase stock, and the remainder would be lent to Softron, secured by Softron's assets. Also according to the material set forth in the fact sheet, if $700,000 was raised, the partnership would purchase 20% of the total outstanding shares of Softron International; ⁵ Masten, Dodak and Whitlock had previously agreed, however, that $250,000 of the SDI funds would be used to purchase 30% of Softron. The fact sheet also had an escape clause which provided that investors who subsequently had second thoughts about investing in SDI could withdraw their investment within 180 days and receive a full refund, plus 10%. The fact sheet failed to address Softron's financial problems, and Masten, when discussing the investment proposal with potential investors, never informed them about Softron's financial straits, including its outstanding liabilities and its negative net worth. Instead, Masten advised prospective investors that Softron was "on the wave up of opportunity," and predicted that each of the $20,000 investment units would be worth $1 million in two to five years. Also, in an attempt to promote and seek his financial product, he told investors that he had gone from selling encyclopedias and facing bankruptcy prior to joining Softron to receiving a monthly salary of $100,000 and now also owned a million dollar home.

At the end of the month of June 1991, Dodak and Whitlock became concerned about Masten's actions, particularly the fact that he had unilaterally changed the terms of the proposed partnership in the fact sheet without making that information available to them. Around the same time, Dodak and Whitlock received access to Softron's internal financial data, which revealed that Masten had grossly underestimated Softron's negative net worth and had overstated Softron's accounts receivable. They realized that the $700,000 figure that Masten had previously represented to them as a sufficient amount to keep Softron running would be inadequate to save the company. On July 2, 1991, Dodak sent Masten a facsimile letter delineating his Through Masten's efforts, by the end of August 1991 SDI had received some $460,000 in new investment money. Even though the fact sheet stated that SDI would begin to purchase Softron stock as soon as the SDI fund contained $300,000, Masten did not purchase any Softron stock for SDI. Instead, Masten used part of the invested money to purchase the company's stock for himself. On October 17, 1991, Masten and Softron President Lorne Bay ("Bay") used $129,000 of SDI-invested money to purchase all outstanding shares of the Softron stock. Masten received 60% of the stock, and Bay received 40%. Masten did not inform SDI investors that he and Bay had purchased all of the Softron stock, and in fact continued to solicit investors. In December 1991, after raising $824,500 for SDI and exceeding his stated goal of $700,000, Masten announced that three SDI investment units were still available. He not only sold these three units but went on to sell another twelve units, ultimately extracting (at the end of the scheme) $1,071,000 from fifty-three SDI investors. By January 1992 the company's lack of sales had caused Softron's net worth to fall to negative $1,200,000. The SDI investors never received the stock promised, as Masten refused to turn over the stock certificates that he and Bay had purchased for themselves.

concerns that Softron was severely undercapitalized, even with the $700,000 being raised. Masten never responded to Dodak and continued to solicit investors.

Not only did Masten fail to provide SDI investors with stock, he also welched on his promise to refund the parties' investment monies when they so requested. The first request for a refund was made in August of 1991, and within a year a number of other SDI investors sought refunds totaling some $165,000. Masten ignored the majority of these requests and stated that the money would be "returned soon."

In April of 1992, Masten offered to sell 5% of Softron's stock for $125,000 to distributor George Varnell. Varnell, even though interested in the promotion, stated that he did not presently have capital available to pay for the stock. In order to accomplish the sale, Masten refunded $20,000 to Varnell, funds which Varnell had previously invested in SDI, on the condition that Varnell immediately reinvest the money as a down payment on his purchase of 5% of Softron's stock. Masten sent Varnell $20,000 which was the proceeds of the investment of three distributors, James Thomas, Gordon Thomas and Etna Lane, who had recently joined and pooled their resources of $20,000 for the joint purchase of one SDI partnership unit. Varnell returned the same $20,000 to Masten as agreed but never received any Softron stock.

In September 1992, when Softron's financial condition had deteriorated to the point of bankruptcy, the State of California's Board of Equalization threatened to seize Softron's assets for nonpayment of taxes. Masten reorganized Softron as a new company in Nevada and moved the company's existing product stock from Chino, California, to Las Vegas, without informing the state authorities or Softron's board of directors and stockholders. He called the new company International Magnetics Corporation ("IMC"). On October 23, 1992, the California Board of Equalization seized those Softron assets that were left behind, including furniture, computers, and furnishings.

On September 13, 1996, a federal grand jury in the Central District of Illinois ⁶ charged Masten in a nine-count indictment. The indictment charged Masten with five counts of mail...