537 F.3d 1202 (10th Cir. 2008), 07-1344, United States v. Gallant

Docket Nº:07-1344, 07-1391, 07-1356, 07-1392, 07-1407, 07-1422, 07-1408, 07-1423.
Citation:537 F.3d 1202
Party Name:UNITED STATES of America, Plaintiff-Appellee/Cross-Appellant, v. Glenn M. GALLANT, Defendant-Appellant/Cross-Appellee. United States of America, Plaintiff-Appellee/Cross-Appellant, v. Douglas R. Baetz, Defendant-Appellant/Cross-Appellee. United States of America, Plaintiff-Appellant/Cross-Appellee, v. Thomas Alan Boyd, Defendant-Appellee/Cross-Appe
Case Date:August 20, 2008
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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537 F.3d 1202 (10th Cir. 2008)

UNITED STATES of America, Plaintiff-Appellee/Cross-Appellant,

v.

Glenn M. GALLANT, Defendant-Appellant/Cross-Appellee.

United States of America, Plaintiff-Appellee/Cross-Appellant,

v.

Douglas R. Baetz, Defendant-Appellant/Cross-Appellee.

United States of America, Plaintiff-Appellant/Cross-Appellee,

v.

Thomas Alan Boyd, Defendant-Appellee/Cross-Appellant.

United States of America, Plaintiff-Appellant/Cross-Appellee,

v.

Jack O. Grace, Jr., Defendant-Appellee/Cross-Appellant.

Nos. 07-1344, 07-1391, 07-1356, 07-1392, 07-1407, 07-1422, 07-1408, 07-1423.

United States Court of Appeals, Tenth Circuit.

August 20, 2008

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John M. Haried and James C. Murphy, Assistant United States Attorneys, (Troy A. Eid, United States Attorney; Michael P. Carey, Assistant United States Attorney, with them on the briefs), Denver, CO, for the Plaintiff-Appellee/Cross-Appellant, United States of America.

Sean Connelly, Reilly, Pozner & Connelly, LLP, Denver, CO (Jason M. Lynch, Reilly, Pozner & Connelly, LLP, Denver, CO; Patrick J. Burke, Patrick J. Burke, P.C., Denver, CO; Robert T. Fishman, Denver, CO, with him on the briefs), for Defendants-Appellants/Cross-Appellees, Glenn M. Gallant and Douglas R. Baetz.

John T. Carlson, Assistant Federal Public Defender, (Raymond P. Moore, Federal Public Defender, with him on the briefs), for Defendant-Appellee/Cross-Appellant, Thomas Alan Boyd.

Daniel J. Sears, Daniel J. Sears, P.C., Denver, CO, for Defendant-Appellee/Cross-Appellant, Jack O. Grace, Jr.

Before TACHA, BRISCOE, and LUCERO, Circuit Judges.

BRISCOE, Circuit Judge.

Defendants Glenn Gallant, Douglas Baetz, Jack Grace, and Thomas Alan Boyd have filed these direct appeals after being convicted of a variety of fraud-related crimes arising from and related to the operation of a credit card portfolio financed by BestBank, a Colorado bank insured by the Federal Deposit Insurance Corporation (“FDIC" ). Defendants Gallant and Baetz were tried before a jury and convicted of conspiracy, bank fraud, false bank reports, wire fraud, and a continuing financial crimes enterprise (“CFCE" ). They now appeal those convictions, arguing that the evidence was legally insufficient to support their convictions and that the district court erred in failing to give a requested jury instruction. Defendants Grace and Boyd were convicted of similar counts in a separate bench trial, but do not appeal their convictions.

Due to the common legal and factual issues presented by these cases, the district court sentenced all four defendants using essentially the same procedures and enhancements. All four defendants appeal their sentences, arguing that the district court committed procedural error in calculating the applicable Guidelines range. The government has cross-appealed the sentences in all four cases, raising a number of challenges to the district court's calculation of the Guidelines range, the procedures used by the district court in conducting sentencing, and the district court's failure to order restitution.

Although not all of the issues raised are common to all four defendants, we are addressing all appeals in a single opinion because there is significant overlap between both the facts and the legal issues. We have jurisdiction pursuant to 28 U.S.C. § 1291 and 18 U.S.C. §§ 3742(a)-(b). We reverse the convictions of Gallant and Baetz on Counts 55 and 56 and affirm

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their convictions on all other counts, reverse the sentences of all four defendants, and remand to the district court with direction to vacate their sentences and resentence.

I. FACTUAL BACKGROUND

In 1989, Edward Mattar purchased a state-chartered bank in Thornton, Colorado, which he renamed BestBank. Mattar reorganized the bank, changing it to a commercial state bank with deposits insured by the FDIC. Because Mattar had no banking experience, regulatory approval for his ownership of the bank was contingent upon his employment of experienced bankers to operate the bank. Accordingly, Mattar hired Thomas Alan Boyd to serve as President of BestBank and Jack Grace to serve as its Chief Financial Officer. Both Boyd and Grace had prior banking experience. Mattar served as Chief Executive Officer of BestBank, and as the sole shareholder, he appointed the Board of Directors. Along with Mattar, Boyd, and Grace, several other persons served on the Board of Directors.

One of the key components of BestBank's business plan was the issuance of VISA credit cards to sub-prime cardholders. Sub-prime cardholders do not qualify for credit cards from most lenders. Many have a bad credit history, or have no credit history at all, and there is a high risk that they will not pay off the debt they accumulate on their credit card accounts. Given the increased probability that sub-prime cardholders will not pay off their debt, assessing interest on the debt is not always as profitable as charging front-end fees to applicants before issuing credit.

To market and operate its sub-prime credit card program, BestBank entered into a Marketing Agreement with Century Financial Services, Inc. (“Century" ) on February 22, 1994. Century was owned and operated by Douglas Baetz and Glenn Gallant, who were prior associates of Boyd.1Under the Marketing Agreement, BestBank established the underwriting criteria and provided the capital for the extension of credit to cardholders. In exchange for its investment, BestBank received six per cent interest above the cost of funds. BestBank also received a portion of the fees charged to the accounts. Century, in turn, performed most of the marketing and management of the credit card portfolio: soliciting credit card applications, issuing cards to applicants, and collecting fees and interest from cardholders. Century profited from the arrangement by collecting fees and other charges from cardholders.

BestBank and Century relied upon a “processor," First Data Resources (“FDR" ), to perform certain tasks for the credit card portfolio. As the processor, FDR monitored accounts, updated account information, collected payments from cardholders, mailed plastic credit cards to cardholders, handled all monetary transactions and postings to accounts, and produced and sent account statements and other reports regarding cardholder payments. In October 1997, Century changed its processor to First Independent Computers, Inc. (“FICI" ), which Baetz and Gallant owned and operated. These processors created daily and monthly reports, which were the primary source of the data that the prosecution and its experts relied upon at trial.

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In order to shield itself from potential losses, BestBank required Century to purchase from it any accounts that were over 120 days delinquent, including accounts that were uncollectible (or “charged off" ). Later, in September 1996, BestBank and Century negotiated an addendum to the Marketing Agreement, requiring Century to purchase all accounts that were over sixty days delinquent. To finance Century's purchase of delinquent or uncollectible accounts, BestBank required Century to keep a bad debt reserve on hand in an account at BestBank. This bad debt reserve originally totaled four per cent of the portfolio, and was later increased to five per cent of the portfolio. BestBank also kept some control over Century's operating account, and Century occasionally needed BestBank's approval to withdraw money from the operating account. In 1996, Century and BestBank further agreed that Century would have a “participation," by which Century would purchase additional non-performing accounts in the credit card portfolio. Despite these protections, BestBank had to absorb any additional losses out of BestBank's own bad debt reserve if delinquent or uncollectible accounts exceeded Century's ability to pay. If these losses, in turn, exceeded BestBank's ability to pay, then state and federal regulators would shut down the bank, and the FDIC would insure BestBank's depositors for up to $100,000 each-which, ultimately, is what happened.

The first joint BestBank/Century credit card venture under the Marketing Agreement began in 1994 with the issuance of secured credit cards. Under the secured credit card program, each applicant was required to open a non-interest-bearing account with BestBank with a minimum security deposit of $250. In exchange for this security deposit, the applicant received a credit card with a credit limit equal to the amount of the security deposit. The applicant was charged a $20 application fee and an annual fee of $129 (later reduced to $95), and the applicant was required to make minimum monthly payments of $20, with eighteen per cent interest charged on any outstanding balance.

Initially, the secured program appeared successful. Century opened a large number of new credit card accounts, using telemarketing to contact potential cardholders. However, all was not well. Although some of the reported accounts were valid, Century, under the direction of Baetz and Gallant, opened a number of accounts without receipt of the mandatory minimum $250 security deposit. In many such cases, Century did not issue cards or account statements to the purported cardholders, thereby concealing the existence of the accounts from the purported cardholders themselves. Sometimes, Century reduced the credit limit on the accounts to zero, or charged the security deposit to the card. Century charged the $129 annual fee, as well as other fees and charges, to these accounts, causing BestBank to transfer funds for these amounts to Century's operating account and to record the amounts as...

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