U.S. v. Carman, 77-1845

Citation577 F.2d 556
Decision Date23 June 1978
Docket NumberNo. 77-1845,77-1845
PartiesFed. Sec. L. Rep. P 96,516 UNITED STATES of America, Plaintiff-Appellee, v. David M. CARMAN, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Harland W. Braun (argued), Los Angeles, Cal., for defendant-appellant.

David R. Hinden, Asst. U. S. Atty. (argued), Los Angeles, Cal., for plaintiff-appellee.

Appeal From the United States District Court for the Central District of California.

Before TUTTLE, * GOODWIN and SNEED, Circuit Judges.

SNEED, Circuit Judge.

David M. Carman was convicted after a 13-day jury trial of bribery, 18 U.S.C. § 201(b); 1 conspiracy, 18 U.S.C. § 371; 2 interstate transportation of money taken by fraud, 18 U.S.C. § 2314; 3 and four counts of securities fraud under the Securities Act of 1933, 15 U.S.C. § 77q(a) and § 77x. 4 He was sentenced to two years imprisonment and a fine of $2,000 for conspiracy, a fine of $5,000 for bribery, a fine of $1,000 for each count of securities fraud, and a fine of $1,000 for interstate transportation of money taken by fraud.

Carman appeals from the convictions, advancing four arguments: (1) he was denied a fair trial because the exculpatory testimony of a codefendant was suppressed by the government's refusal to grant immunity to the codefendant; (2) the transactions underlying the securities fraud charges are not "investment contracts" and are therefore not securities within the meaning of the Securities Act of 1933 ("the Act"); (3) the grand jury's indictment and the trial court's jury instruction regarding the interstate transportation of money taken by fraud embraced acts not within the reach of 18 U.S.C. § 2314; (4) the conspiracy conviction should be set aside in the event any substantive count conviction is overturned.

We find no error in the proceedings below with respect to the first two issues. However, we agree with Carman that the interstate transportation of money taken by fraud conviction should be overturned and that this reversal requires overturning the conspiracy conviction also. Therefore, we affirm in part and reverse in part.

I.

Facts.

David Carman was a co-owner and Vice President of Automation Institute (AI) which owned six vocational training schools in California doing business as West Coast Trade Schools.

Operating funds for these schools were derived almost exclusively from two sources: direct federal grants provided to schools under the Campus Based Aid Program; and the sale of packages of Federally Insured Student Loans (FISL) to various financial institutions.

Campus Based Aid encompasses four programs (National Direct Student Loan Program, College Work Study Program, Basic Educational Opportunity Grant Program, and Supplemental Educational Opportunity Grant Program), all of which provide federal funds directly to schools as trustees for students. Local administration of the program is handled by the Division of Student Assistance of the Office of Education in San Francisco. Subpanels within the Division of Student Assistance review applications for grants and make recommendations as to the amounts to be awarded to each applicant.

In the period during which West Coast Schools applied for and received these grants, the Division of Student Assistance was headed by James Hoffe. Hoffe also presided over one of the subpanels. In October 1972 Hoffe was approached by Carman, O. A. Dameron (a former vice president of AI), and William F. Peters (president of AI). Peters asked Hoffe if he would be willing to "guide" West Coast Schools' applications through the subpanels so that they would receive the most favorable treatment possible. Peters also informed Hoffe of a consulting service contemplated by Group II Equities (a corporation owned by Carman, Peters and Fred P. Fisher, another co-owner of AI), through which applications would be prepared and submitted on behalf of other schools. In return for his services, Hoffe was to receive $1,000 per month and a portion of the profits earned by Group II Equities. Hoffe agreed to this arrangement. The agreement was finalized a few days later in a meeting attended by Carman, Hoffe, Peters, Dameron, and Fisher.

Pursuant to this arrangement, Hoffe drafted grant applications for West Coast Schools and had those applications diverted to the subpanel over which he presided, ensuring favorable recommendations on the grants requested. It is this activity which formed the factual basis for the bribery charge and one object of the conspiracy charge.

In addition to grants from Campus Based Aid, West Coast Schools also raised operating funds by obtaining promissory notes from students (in return for furnishing educational expenses), applying for federal insurance on the repayment of those notes, and then selling packages of the Federally Insured Student Loans at full face value to financial institutions. West Coast Schools' continued participation in the FISL program was dependent upon its receiving accreditation from the National Association of Trade and Technical Schools (NATTS), an agency of HEW. In October 1972 West Coast Schools was informed that failure to obtain accreditation by February 1973 would terminate its eligibility for the FISL program. Accreditation was being withheld primarily because of the precarious financial position of West Coast Schools. Many students had dropped out of school and were thereby entitled to a reduction in the principal amount of their promissory note. Because the notes had been sold at full face value, West Coast Schools was obligated to refund the difference to purchasers of the notes. At that time, West Coast Schools' refund liability was in excess of $500,000.

Accreditation was denied in January 1973 and, pending appeal, a $300,000 limit was placed on the FISL loan commitment to West Coast Schools. Despite this limitation, West Coast Schools obtained over $600,000 in FISL notes between January and April of 1973. In April accreditation was again formally denied and the over-extension of FISL guarantees was discovered. On May 1, 1973, the schools' FISL eligibility was formally suspended, and West Coast Schools ceased operations on May 24, 1973.

Despite the financial pressure of its refund liability and the uncertainty concerning its future participation in the FISL program, West Coast Schools continued to sell almost $1,000,000 in FISL packages to several credit unions between February and May of 1973. In addition to FISL notes, the "packages" included the following features: a contract under which Group II Equities would service the FISL paper (bill the government for monthly interest while the students were in school, and then bill graduated students for principal and interest); an agreement that West Coast Schools would repurchase any FISL notes that went into default; and a further agreement that West Coast Schools would buy back blocks of notes from the purchasers if given reasonable notice.

These features were consistent with the credit unions' investment objective of obtaining a high return on short-term, liquid transactions. However, at the time they purchased the FISL packages, the credit unions were not informed of West Coast Schools' precarious financial position, nor of its accreditation problems and the imminent suspension of FISL eligibility. Both factors materially affected West Coast Schools' ability to honor its repurchase agreements, and it is this failure to disclose material facts which forms the basis of the securities fraud charges.

Two days before West Coast Schools ceased operations, Carman, Peters and Fisher withdrew $290,000 from a Group II Equities account. The funds represented proceeds of a FISL package sold on May 8, 1973 (a transaction underlying one count of the securities fraud charges). In order to insulate these funds from attachment by creditors, approximately $280,000 of the withdrawal was transported to Arizona, converted to cashier's checks, then laundered through various accounts in California, Arizona, and Washington, D. C., giving rise to the charge of interstate transportation of money taken by fraud.

On October 15, 1976, Carman, Hoffe, Dameron, Fisher and Peters were indicted for conspiracy and bribery; Carman, Fisher, and Peters were also indicted for securities fraud and interstate transportation of fraudulently obtained money. 5

II. Was Exculpatory Evidence Suppressed At Carman's Trial?

As stated above, Carman and Hoffe were both charged with conspiracy and bribery. Prior to trial, the government entered into a plea agreement with Hoffe. Hoffe pled guilty to conspiracy to commit a conflict of interest and the government agreed to dismiss the bribery count at the time of sentencing.

Claiming that Hoffe would give exculpatory testimony if allowed to testify without threat of prosecution, Carman moved the court to reject Hoffe's plea unless it was conditioned on Hoffe's full and honest testimony at Carman's trial. The motion was denied and Carman now claims that the denial, coupled with the government's refusal to grant immunity to Hoffe, constituted a deliberate suppression of exculpatory evidence and a denial of due process.

A defendant has no absolute right to elicit testimony from any witness, codefendant or not, whom he may desire. United States v. Gay, 567 F.2d 916, 919 (9th Cir. 1978). Furthermore, the government cannot be compelled to grant immunity to any prospective defense witness. United States v. Bautista, 509 F.2d 675 (9th Cir.), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975); Cerda v. United States, 488 F.2d 720 (9th Cir. 1973); United States v. Jenkins, 470 F.2d 1061 (9th Cir. 1972), cert. denied, 411 U.S. 920, 93 S.Ct. 1544, 36 L.Ed.2d 313 (1973). Although Earl v. United States, 124 U.S.App.D.C. 77, 361 F.2d 531 (1966), cert. denied, 388 U.S. 921, 87 S.Ct. 2121, 18 L.Ed.2d 1370 (1967), suggested that due process might be violated where the government immunizes its own witnesses but refuses...

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