U.S. v. Cavin

Decision Date02 December 1994
Docket NumberNo. 93-3643,93-3643
Citation39 F.3d 1299
Parties41 Fed. R. Evid. Serv. 1201 UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. George C. CAVIN, Defendant-Appellant, John E. Seago and Gerald J. Daigle, Jr., Defendants-Appellants, Cross-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

John DiGiulio, Baton Rouge, LA, for Seago.

Arthur A. Lemann, III, Lemann, O'Hara & Miles, New Orleans, LA, for Cavin.

Phillip A. Wittmann, Sarah S. Vance, Dane S. Ciolino, Thomas M. Flanagan, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, LA, for Daigle.

Michael M. Noonan, Margaret Diamond, New Orleans, LA, amicus curiae on behalf of Daigle.

Steven I. Irwin, Peter G. Strasser, Asst. U.S. Attys., Robert J. Boitmann, U.S. Atty., New Orleans, LA, for U.S.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before POLITZ, Chief Judge, DUHE and BARKSDALE, Circuit Judges.

POLITZ, Chief Judge:

Gerald J. Daigle, Jr., George C. Cavin, and John E. Seago appeal their convictions for conspiracy to defraud the Louisiana insurance regulators and related substantive offenses. For the reasons assigned we reverse in part and vacate and remand in part.

Background

In 1987 David B. Ridgeway, an insurance executive, established his own company, Alliance Casualty and Reinsurance Company. Under Louisiana law, Alliance needed $1.5 million in assets to receive an operating license from the Commissioner of Insurance. Unable to raise the funds, Ridgeway persuaded Dieter Hugel, a friend and investor, to loan him $1 million on a short-term basis. Ridgeway did not report to the Commissioner that two-thirds of the company's capital was merely a short-term loan. Nor did he reveal that a $50,000 investment by Glynn Pittman, another friend, was also a loan or that Pittman had invested $35,000 on behalf of Larry Stoulig, a principal in Alliance's outside auditor, Stoulig & Buckley.

Ridgeway's efforts were assisted professionally by Daigle, an associate soon to become partner at a prestigious New Orleans law firm. As Alliance's outside counsel, Daigle prepared the private placement memorandum used to attract investors and the application for a Certificate of Authority from the Louisiana Insurance Commissioner.

Alliance's certification application was filed but Sherman A. Bernard, then Louisiana Insurance Commissioner, took no action until Ridgeway paid him $10,000. The certificate issued on March 9, 1988 and Alliance commenced business.

From the start, solvency was a problem. Louisiana law required domestic insurers to maintain $1.5 million in policyholder surplus; otherwise they would be subject to regulatory action, up to and including liquidation. 1 In addition, Alliance was required to maintain a ratio of net premiums to surplus that did not exceed 3-to-1. To replace the $1 million repaid to Hugel, acting through Alliance's holding company, Alliance Management Group, 2 Ridgeway entered into a stock rental transaction. In exchange for monthly payments of $10,000, AMG received a term assignment of 500,000 shares of Chaparral Mining Company stock with a purported value of $1 million. AMG in turn transferred the stock to Alliance which reported it to the Commissioner as an unencumbered asset. Daigle reviewed the documentation and accompanied Ridgeway to the closing of the transaction in Denver. According to Ridgeway, the two joked on the return trip about the purported value of the stock; neither believed it was really worth $1 million. 3 The transaction was closed in January 1989 but the agreement was dated December 15, 1988 and reported on Alliance's 1988 annual statement.

Despite the infusion of the stock, Alliance showed only a $489,662 surplus on its June 30, 1989 quarterly report. The report caught the attention of the Commissioner's office, which threatened to place Alliance in administrative supervision unless it raised $1 million in additional capital by September 30. Unable to do so, Ridgeway used $800,000 in premium payments and a short-term loan from Hugel to create the illusion of $1 million in new assets. Ridgeway testified that Daigle knew the source of the funds, advised him to proceed, and drafted a letter to lend authenticity to the purported capital contribution.

For the 1989 annual statement a $700,000 note swap was structured. Ridgeway obtained a $350,000 promissory note in favor of Alliance from Coordinated Financial Planners, a company owned by a friend, in exchange for a nominal fee and AMG's note at a slightly higher interest rate. Daigle obtained a similar note from Marmex International, an inactive company owned by clients, also in exchange for a small fee. Neither CFP nor Marmex was indebted to Alliance or AMG. The notes were reported as assets on the year-end 1989 statement, even though Wayne Ducote, designated by the Commissioner as Alliance's informal supervisor, rejected them as "B.S. transactions."

The 1989 annual statement also reflected as an unencumbered asset a $1 million asset-backed bond issued by American Midwest Capital Corporation (AMCC). In a transaction brokered by Cavin and reviewed by Daigle, the bond was assigned to Alliance for a three-year term in exchange for AMG's debenture and monthly interest payments. The bond purportedly was collateralized by $1 million in Federal National Mortgage Association securities which in reality were purchased by AMCC on margin; the available equity was only $158,000. In addition, Ridgeway again turned to Hugel for another $1 million loan which, like the other loans, was repaid immediately after the end of the reporting period.

The Commissioner disallowed the AMCC bond and the CFP and Marmex notes, requiring Alliance to raise an additional $1 million by June 30, 1990. Ridgeway could not do so. In lieu thereof, on June 28 he obtained a $1 million check from Seago & Carmichael, a law firm seeking defense work with Alliance. On July 2, AMG issued a $1 million check to Seago & Carmichael. Both checks were dishonored. Nevertheless, the check from Seago & Carmichael was included as a $1 million asset on the June 30 quarterly report.

To dress up the 1990 annual statement, Ridgeway employed a new stratagem which he asserted Daigle orchestrated. On December 31, Ridgeway wrote a $3 million check on AMG's First City Bank account for deposit to Alliance's Whitney National Bank account. At that time the First City account had only a $100,000 balance. Ridgeway then wrote a $3 million check on the Whitney account, which likewise did not have sufficient funds, to buy securities through Legg Mason, Alliance's brokerage house. On January 2, Alliance transferred the securities back to AMG, which sold them and used the sale proceeds to cover the December 31 check. The transaction resulted in a Legg Mason statement showing $3 million worth of securities on December 31, 1990. These were reported as new assets on Alliance's year-end statement to the Commissioner.

Stoulig & Buckley uncovered the substance of the year-end transactions during an audit and expressed its intent to issue a letter indicating an insecure financial condition, but agreed to defer if Ridgeway raised $3 million in real assets. Once again, Ridgeway borrowed the money from Hugel, repaying it immediately after the auditors finished their field work.

Ridgeway tried to repeat the year-end transaction at the close of the first quarter of 1991. This time the scheme did not work; Ridgeway's contact at Legg Mason had died and Legg Mason's head accountant discovered that Alliance's check would not clear. Legg Mason "unwound" the transaction but Alliance nevertheless received a March statement showing the purchase of $3 million in securities which Ridgeway reported as assets on the March 31 quarterly report.

Ridgeway continued to seek additional capital. In April 1991, he submitted a package to Whitney Bank in support of his application for a $5 million loan, containing, among other items, Alliance's 1990 annual statement to the Commissioner. Whitney rejected the loan application.

Ridgeway and Daigle devised another plan. In September 1991 Ridgeway executed a $6 million promissory note from AMG to Alliance, backed by $6 million in U.S. Treasury notes purchased on margin. Although AMG had only $600,000 in equity in the collateral, Ridgeway reported the transaction as a $6 million asset on the September 30, 1991 quarterly report, ignoring Daigle's admonition to book the AMG non-equity interest as a second lien.

Alliance underwent a statutorily required examination in October 1991, which concluded that the company had a negative policyholder surplus of $13 million. It immediately was placed in administrative supervision, then conservation, rehabilitation, and ultimately, liquidation. During Alliance's brief existence, Ridgeway received from it at least $1.5 million in salary, fringe benefits, and personal loans.

Ridgeway, Daigle, Seago, Cavin, and others were named in a 22-count indictment charging conspiracy to defraud the state regulators and Alliance policyholders, as well as various fraud offenses. Ridgeway pleaded guilty to all counts and testified for the government. Daigle, Seago, and Cavin, among others, proceeded to trial on a 26-count superseding indictment. All three were convicted of conspiracy in violation of 18 U.S.C. Sec. 371. In addition, Daigle was convicted of two counts of making false representations to a bank in violation of 18 U.S.C. Sec. 1014, two counts of mail fraud in contravention of 18 U.S.C. Sec. 1341, nine counts of wire fraud in violation of 18 U.S.C. Sec. 1343, one count of bank fraud in violation of 18 U.S.C. Sec. 1344, and two counts of illegal monetary transactions in contravention of 18 U.S.C. Sec. 1957. Cavin was convicted of one count of mail fraud, five counts of wire fraud, and one count of an illegal monetary transaction; Seago was convicted of one count of mail fraud and one count of bank fraud. Daigle was...

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