185 F.3d 112 (3rd Cir. 1999), 98-1260, United States v Stewart

Docket Nº:ALLEN W. STEWART, Appellant in Nos. 98-1260
Citation:185 F.3d 112
Party Name:UNITED STATES OF AMERICA, v.
Case Date:July 16, 1999
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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185 F.3d 112 (3rd Cir. 1999)

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1260

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1302

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1541

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1716

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1860

UNITED STATES OF AMERICA,

v.

ALLEN W. STEWART, Appellant in Nos. 98-1968

Nos. 98-1260, 98-1302, 98-1541, 98-1716, 98-1860, and 98-1968

United States Court of Appeals, Third Circuit

July 16, 1999

Argued May 27, 1999

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Crim. No. 96-00583-1) District Judge: Honorable Harvey Bartle, III

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W. Neil Eggleston (argued), Richard A. Ripley, Timothy K. Armstrong, Howrey & Simon, 1299 Pennsylvania Avenue, N.W., Washington, DC 20004

Kenneth I. Trujillo, Ira Neil Richards, Trujillo Rodriguez & Richards, LLC, The Penthouse, 226 West Rittenhouse Square, Philadelphia, PA 19103, Attorneys for Appellant-Cross- Appellee Allen W. Stewart

Michael R. Stiles, United States Attorney, Walter S. Batty, Jr., Assistant United States Attorney, Chief of Appeals, Linda Dale Hoffa (argued), Assistant United States Attorney, Michael V. Rasmussen (argued), Special Assistant United States Attorney, Suite 1250, 615 Chestnut Street, Philadelphia, PA 19106-4476, Attorneys for Appellee-Cross- Appellant United States of America

Ross S. Myers, National Association of Insurance Commissioners, 120 W. 12th Street, Suite 1100, Kansas City, MO 64105, Attorney for Amicus Curiae National Association of Insurance Commissioners

BEFORE: GREENBERG and ALITO, Circuit Judges, and DOWD,[*] District Judge

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OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

On December 17, 1997, a district court jury convicted Allen W. Stewart, formerly a partner in a Philadelphia law firm, of 135 counts of mail fraud, 18 U.S.C. S 1341, wire fraud, 18 U.S.C. S 1343, money laundering, 18 U.S.C. S 1957, and racketeering, 18 U.S.C. S 1962(c). On August 12, 1998, the court sentenced Stewart to 180 months in prison, to be followed by three years of supervised release and required him to forfeit substantially all of his known assets and to pay $60 million in restitution.

Stewart appeals from the judgment of conviction and sentence, raising many legal issues as to why he is entitled to a new trial or an acquittal. Stewart also challenges the district court's forfeiture of his personal Merrill Lynch account ("the Account") as substitute assets under 18 U.S.C. S 982(b)(1). The government cross-appeals the district court's ruling that the Account was not directly forfeitable under 18 U.S.C. S 982(a)(1) as property "involved in" or "traceable to" Stewart's money laundering activities. For the reasons that follow, we will affirm Stewart's conviction and sentence and the other orders from which he appeals. We, however, will reverse on the government's cross-appeal and thus will modify the district court's forfeiture order so that the Account is forfeited directly rather than as a substitute asset. As modified, we will affirm the forfeiture order.

II. BACKGROUND

A. Factual History

This case involves a very complicated series of fraudulent transactions that we only summarize. Stewart's activities revolved around various insurance companies and shell corporations he created to facilitate his fraudulent transactions. Stewart's two main vehicles for his criminal activities were Summit National Life Insurance Company ("Summit"), formerly an Ohio corporation that moved to Pennsylvania, and Equitable Benefit Life Insurance Company ("EBL"), a Pennsylvania corporation. In 1994, the Pennsylvania Department of Insurance ("Department") took control of these companies because they were insolvent. Stewart had sold these companies for a nominal amount immediately before their insolvency was revealed. During his ownership, each company reported that its assets exceeded its liabilities. These surpluses were fraudulent, however, as the companies inflated their assets with unsecured worthless IOUs and accounting acrobatics aimed at concealing the huge deficits that Stewart created by his leveraged purchase of Summit and by his other conduct.

The fraudulent transactions began in 1988 when Stewart, who already owned EBL through a holding company, bought Summit. Stewart originally became involved in the Summit purchase as Richard Fanslow's attorney in Fanslow's attempt to acquire Summit. To facilitate the acquisition of Summit, Fanslow created a shell corporation to buy Summit for $52 million, subject to post- closing adjustments. When Fanslow's bid failed because of the disapproval of Ohio's insurance regulators, Stewart stepped in as the purchaser. When Stewart took over, he needed approximately $62 million to buy out Fanslow and purchase Summit.

In preparing to purchase Summit, Stewart formed a Pennsylvania partnership called Summit Company in which he assigned the interests as follows: 9% to himself, 9% to his wife, 34% to a stepson, 24% to a trust he had created for another stepson, and 24% to a trust he had created for his son. Despite his 9% ownership, Stewart exercised actual control over the partnership. According to the purchase agreement between Stewart and Fanslow, Stewart was to pay Fanslow $473,499 in

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cash, deliver a $6.4 million promissory note to him and pay a large portion of Fanslow's deposit to acquire Summit. On October 6, 1988, Stewart acquired Summit with a $47.7 million bank loan and a $2.7 million contribution from EBL.

Stewart then needed approximately $62 million to pay the bank, Fanslow, and other expenses, as well as to secure the promissory note. Summit's $31 million capital and surplus could not cover this amount, so Stewart devised a number of schemes to pay off his debts without showing a reduction in Summit's assets.

First, Summit sent more than $70 million to EBL. In turn, EBL passed $62 million through a handful of Stewart's shell corporations, which eventually paid the bank loan and Fanslow. In return for the $62 million, these shell corporations generated a series of unsecured IOUs to EBL and Summit.

Stewart made these transfers pursuant to a reinsurance agreement between EBL and Summit. In exchange for the $70 million it received from Summit, EBL agreed to pay future claims on a portion of Summit's policies. Summit, in turn, recorded a reduction in liabilities corresponding to its reduction in assets when it gave EBL the $70 million. EBL recorded a corresponding increase in assets and liabilities. However, Summit continued to make the payments on claims for which EBL supposedly assumed responsibility. Stewart continued hiding Summit's missing assets by double-pledging the collateral used to secure the Fanslow promissory note and through further fraudulent transactions whereby Stewart would circulate money taken from Summit through his other corporations before returning it to Summit as payments on the IOUs. Summit also engaged in a sham reinsurance agreement with an unrelated insurance company, similar to the fraudulent agreement it had entered into with EBL, and purchased another insurance company in 1992, to which it assigned all of EBL's profitable business.

Stewart did not inform the Ohio insurance regulators of his acquisition of Summit. When they learned of it, the regulators disapproved and ordered the transaction unwound. Stewart then sued the Ohio Commissioner of Insurance following which the parties reached a settlement in which Summit agreed to sell its Ohio policies to another insurer and move out of Ohio.

In addition to his fraudulent efforts to conceal the deficits in his insurance companies, Stewart also began stealing funds from Summit for his personal use. Pursuant to its agreement with the Ohio regulators, Summit sold 25% of its policies to an unrelated insurance company, Continental Western, and its parent, Beneficial Life Insurance Company ("Beneficial"), in exchange for an annual return of 90% of the profits from these policies. In January 1992, Stewart caused Summit to assign, without compensation, this agreement to another shell corporation he controlled. He used the payments from Beneficial to help purchase a $1.6 million ocean-front house in Del Mar, California, to pay for improvements to the house and furnish it with antiques, to pay a $100,000 annual salary to his girlfriend, and to pay $20,000 in "professional fees" to his son. It also appears that Stewart "borrowed" $2 million from Summit through a similar scheme to pay for renovations to his wife's house in Radnor, Pennsylvania.

Stewart ultimately concluded that he should sell Summit and EBL before anyone would have the opportunity to detect his fraudulent activities. In September 1992, he convinced Larry Fondren, an interested buyer, to sign a letter of intent to purchase the companies for approximately $8 million. When Fondren tried to examine their books his due diligence was obstructed, and thus he attempted to withdraw from the purchase. Stewart then sought another buyer but that buyer's accountant discovered that Summit and EBL

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were insolvent. Meanwhile, Stewart had brought suit against Fondren and thereby forced Fondren to go through with the purchase on the condition that he would not make a substantial payment for the companies.

After he took over the companies, Fondren's fears were realized when he discovered that both were insolvent. He contacted the Department...

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