194 F.3d 442 (3rd Cir. 1999), 98-1102, United States v. Yeaman
|Docket Nº:||DAVID REX YEAMAN Appellant in No. 98-1102|
|Citation:||194 F.3d 442|
|Party Name:||UNITED STATES OF AMERICA Appellant in No. 98-1146, v.|
|Case Date:||October 15, 1999|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued July 30, 1999
On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Crim. Action No. 96-cr-00051-3) District Judge: Honorable Clarence C. Newcomer
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Frank C. Razzano (Argued) Eric A. Bensky Dickstein, Shapiro, Morin & Oshinsky 2101 L Street, N.W. Washington, D.C. 20037 Attorneys for David Yeaman Appellant in No. 98-1102
Michael R. Stiles U.S. Attorney Walter S. Batty, Jr. Assistant U.S. Attorney Robert E. Courtney, III Deputy U.S. Attorney Andrea G. Foulkes (Argued) Assistant U.S. Attorney Thomas V. Sjoblom Special Assistant U.S. Attorney Office of U.S. Attorney 615 Chestnut Street, Suite 1250 Philadelphia, PA 19106 Attorneys for United States of America Appellant in No. 98-1146
Paul A. Tufano, General Counsel Commonwealth of Pennsylvania 330 Market Street Harrisburg, PA 17120 and Alan C. Kessler Andrew W. Allison (Argued) Buchanan Ingersoll Eleven Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 Attorneys for Amicus M. Diane Koken Insurance Commissioner of the Commonwealth of Pennsylvania
BEFORE: SLOVITER, NYGAARD and STAPLETON, Circuit Judges
OPINION OF THE COURT
STAPLETON, Circuit Judge:
David Rex Yeaman, along with four other defendants, was convicted of various counts of conspiracy, wire fraud, and securities fraud. His conviction resulted from his involvement in a complex scheme involving the leasing of worthless stocks of three public companies, U.S. Card Investors, Inc. ("U.S. Card"), Omega Power ("Omega"), and American Family Services ("AFS"), to the Teale Network ("Teale"), a fraudulent network of offshore and domestic
companies.1 Teale represented these leased stocks as assets available to pay claims pursuant to reinsurance contracts entered into with a Pennsylvania-based insurance company, World Life and Health Insurance Co. ("World Life"). When these assets were called upon to pay outstanding medical reinsurance claims, the stocks were deemed worthless.
Yeaman has appealed from the jury's verdict and a sentencing adjustment. The government has cross-appealed the sentence imposed by the District Court.
World Life became insolvent at some point in or before 1988. It hid its insolvency from regulators and its insureds, however, by placing a piece of land valued at $60,000 on its books as worth several million dollars. World Life issued the four group medical policies involved in this case in late 1989, in the spring of 1990, in the summer of 1990, and on December 1, 1990. Teale's contracts reinsuring these policies were entered on November 16, 1989, May 30, 1990, June 28, 1990, November 10, 1990, and November 11, 1990. Pursuant to these agreements, Teale assumed 100% of the liability under the four group medical insurance policies issued by World Life in exchange for 92% of the premiums paid by World Life's insureds on those policies. These reinsurance transactions allowed World Life to reflect a reserve credit of approximately $6 million. Teale received total premiums from World Life of approximately $7 million under its reinsurance contracts. The indictment alleged that the conspiracy among Teale and the defendants existed from about May of 1990 to June of 1992.
In 1990, Philip Rennert created Forum Rothmore, which acted as an intermediary between Teale and publicly traded corporations that desired to lease their stock. Forum Rothmore entered into "surplus contribution agreements," known as RENN contracts, with Teale. The first RENN contract involving one of the defendants was executed on September 1, 1990. Yeaman was involved in a series of RENN contracts entered between December 1, 1990, and April 1, 1991.
Under the terms of these contracts, corporations leased their stock to Teale and authorized the sale of the stock if necessary to pay claims under insurance policies that Teale had reinsured. The value of the stock leased was calculated by multiplying the number of shares by the market price. Teale then listed these shares at the same value on the financial statements presented to World Life. In exchange, Teale paid a percentage of the monthly leasing fees it received from World Life to Forum Rothmore, which in turn split the fees with the stock providers. Of the approximately $7 million Teale received, about $3.3 million was distributed to the defendants as rental fees for the leased securities.
Yeaman was president of Capital General Corporation ("Capital General"). Capital General assisted other companies in going public through mergers with existing shell corporations that had previously completed their SEC registration. After the merger, Capital General retained some interest in the corporations, and Yeaman handled the registration and promotion of the stock. National Stock Transfer ("NST"), a subsidiary of Capital General, was the transfer agent and performed the record keeping functions for the public corporations with whom Capital General dealt.
U.S. Card, Omega, and AFS were formed via mergers orchestrated by Yeaman and Capital General. U.S. Card was a small baseball card business operated in the home of the father of one of Yeaman's associates in Hull, Massachusetts. Its total
inventory was less than $50,000. Omega was a nearly insolvent business that bought and sold surplus high voltage power line equipment. Omega had minimal operations conducted by a sole proprietor who was desperately seeking capital for his business. AFS also had no significant assets or profit making activity. Yeaman was an officer and director of these three corporations.
In spite of the minimal value of these corporations, Yeaman purported to lease $8 million of U.S. Card stock, $2 million of Omega stock, and $2 million of AFS stock to Teale. In order to be able to attribute such high values to these stocks, Yeaman manipulated the market quotes and inflated the financial statements of these corporations. Moreover, while certain of these stocks were restricted, they were represented to be marketable and were transferred without any indication of their restricted status. Forum Rothmore assisted Yeaman in leasing these falsely-valued and restricted stocks. In short, securities were falsely held out by the defendants and Teale to be marketable and valuable, when, in fact, they were not marketable and were virtually without value.
In January 1991, the Pennsylvania Insurance Department began to investigate World Life's financial condition. On July 28, 1991, the Pennsylvania Insurance Commissioner declared World Life insolvent and ordered its liquidation. Since Teale had been paying insurance claims with recently received premiums and had no other significant assets to draw upon, this liquidation deprived Teale of the ability to pay further claims.
The Pennsylvania Life and Health Insurance Guarantee Fund is a state fund authorized by statute to pay outstanding liabilities of licensed Pennsylvania companies that become insolvent. The Guarantee Fund is financed by Pennsylvania insurance companies. When World Life was liquidated, the Guarantee Fund paid the outstanding group medical reinsurance claims left unpaid as a result of the fraud. The unpaid claims totaled over $6 million.
In February 1996, Yeaman was indicted in the Eastern District of Pennsylvania and charged with one count of conspiracy and multiple counts of wire and securities fraud. The conspiracy charge included an allegation that Yeaman failed to disclose in SEC and NASD filings that he "previously had been found to have violated the securities laws." (A.116, Count 1 P 6(o)(2)). This allegation was incorporated into the wire and securities fraud counts. Yeaman moved to strike this language from the indictment on the ground that he had no duty to disclose former securities law violations and/or that he did disclose the information required by law.
The District Court denied Yeaman's motion because it determined that if certain predicate facts could be established, Yeaman had a duty to disclose five securities related administrative proceedings. The government later introduced two of these proceedings into evidence. One proceeding was a 1988 SEC administrative action against NST that resulted in a censure order. See In the Matter of National Stock Transfer, Inc., 41 S.E.C. Docket 1219 (1988). The other proceeding was an SEC investigation that began in 1987 and culminated in a cease and desist order entered against Yeaman and Capital General in 1993. See In the Matter of Capital General Corp., 54 S.E.C. Docket 1322 (1993). A third proceeding, in which the Oregon Department of Insurance and Finance entered a cease and desist order against Yeaman and Capital General, was admitted by stipulation of the parties. See In the Matter of Capital General Corp. and David Yeaman, E7-49 (Oregon Dept. of Ins. & Finance, April 28, 1988).
After a four week trial, the jury, by general verdict, convicted Yeaman of the one count of conspiracy, five counts of wire fraud, and three counts of securities fraud. At the sentencing hearing, the District Court assigned Yeaman an offense level of 11, which included a one-point upward departure
for causing a loss of confidence in an important institution. The District Court found no monetary loss attributable to Yeaman and refused to impose adjustments for jeopardizing the safety of a financial institution and use of special skills. The District Court sentenced...
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