U.S. v. Gleason

• Decision Date: 17 March 1980
• Docket Number: Nos. 125,D,126 and 137,s. 125
• Citation: 616 F.2d 2
• Parties: 5 Fed. R. Evid. Serv. 373 UNITED STATES of America, Appellee, v. Harold V. GLEASON, Paul Luftig and J. Michael Carter, Defendants-Appellants. ockets 79-1147, 79-1151 and 79-1208.
• Court: U.S. Court of Appeals — Second Circuit

Page 2

616 F.2d 2

5 Fed. R. Evid. Serv. 373

UNITED STATES of America, Appellee, v. Harold V. GLEASON, Paul Luftig and J. Michael Carter,

Defendants-Appellants.

Nos. 125, 126 and 137, Dockets 79-1147, 79-1151 and 79-1208.

United States Court of Appeals, Second Circuit.

Argued Oct. 9, 1979.

Decided Dec. 19, 1979.

Certiorari Denied March 17, 1980. See 100 S.Ct. 1320.

Stanley S. Arkin, New York City (Mark S. Arisohn, Arthur T. Cambouris, Stanley Neustadter, Arkin & Arisohn, P.C., New York City, of counsel), for defendant-appellant Gleason.

Harold R. Tyler, Jr., New York City (Michael B. Mukasey, Kenneth A. Caruso, Marjorie T. Coleman, Mark R. Hellerer, Patterson, Belknap, Webb & Tyler, New York City, of counsel), for defendant-appellant Luftig.

Otto G. Obermaier, New York City (Martin L. Perschetz, Obermaier, Morvillo, Abramowitz & Fitzpatrick, New York City, of counsel), for defendant-appellant Carter.

John J. Kenney, Asst. U. S. Atty., New York City (Robert B. Fiske, Jr., U. S. Atty. for the Southern District of New York, Mary Ellen Kris, Charles M. Carberry, Richard D. Weinberg, Asst. U. S. Attys., New York City, of counsel), for appellee.

Moore, Berson, Liflander & Mewhinney, New York City (Earle K. Moore, Matthew L. Lifflander, New York City, of counsel), for amici curiae Group of Bankers.

Before LUMBARD, MANSFIELD and MESKILL, Circuit Judges.

MANSFIELD, Circuit Judge:

Harold V. Gleason, former Chairman of the Board of the Franklin National Bank ^B, Paul Luftig, its former president and chief administrative officer, and J. Michael Carter, its former senior vice president in charge of its Investment Division, appeal from judgments of the District The evidence, viewed favorably to the Government (as it must be at this stage, Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 86 L.Ed. 680 (1942)), shows that, although FNB suffered an operating loss in excess of $7 million during the three-month period ending March 31, 1974, it issued a financial statement on April 18, 1974, for the same first quarter of 1974 falsely representing that it had realized earnings of approximately $79,000. The financial statement was of special significance to FNB because of its anticipated influence in obtaining Government approval of a proposed FNB merger with Talcott National Corporation, a factoring and finance company, and in borrowing some $35 million from Manufacturers Hanover to be used by FNB for the purchase from Michele Sindona, the principal stockholder of FNB, of his interest in Talcott. ⁵

Court of the Southern District of New York, entered on March 27, 1979, by Judge Thomas P. Griesa after an eight-week jury trial, convicting them (except for dismissal of charges in Count Three against Carter) of (1) making false entries in the bank's records on or about March 31, 1974, by false evaluation of securities with intent to defraud, thereby concealing operating losses in excess of $5 million and making it appear that FNB had a profit of $79,000, for the first quarter of 1974, all in violation of 18 U.S.C. § 1005 ¹ (Count Two), (2) making false entries in the bank's records on or about March 31, 1974, with intent to defraud, by causing FNB to enter into fictitious foreign exchange contracts showing a non-existent profit in excess of $2 million, which falsely made the bank appear to have a profit for the first quarter of 1974 when in fact it had suffered heavy losses, also in violation of 18 U.S.C. § 1005 (Count Three), ² (3) making false statements to the Manufacturers Hanover Trust Company on or about April 18, 1974, to influence its action in fulfilling a $35 million loan commitment previously made to FNB, by submitting to Manufacturers Hanover a consolidated income statement for the first quarter of 1974, ending March 31, showing a profit of $79,000 when in fact the bank had suffered losses of over $7 million, in violation of 18 U.S.C. § 1014 ³ (Count Four), (4) employing a manipulative scheme or device during March 1974 and on various dates in April and May 1974, in connection with the purchase and sale of FNB stock by using the foregoing falsifications of bank records to make it appear that the bank had realized a profit for the first quarter of 1974, when in fact it had suffered heavy losses, in violation of 15 U.S.C. §§ 78j(b) and 78ff ⁴ (Counts Five through Fourteen), and (5) conspiracy to commit each of the foregoing crimes, in violation of 18 U.S.C. § 371 (Count One). In addition, Luftig alone was convicted of making false material declarations on or about March 15, 1977, with respect to some of the matters that are the subject of the foregoing charges in his testimony before a grand jury in violation of 18 U.S.C. § 1623 (Count Fifteen). Appellants claim that numerous errors were committed in the trial of the case. After careful consideration of each of these contentions we affirm the convictions.

FNB had begun to suffer substantial losses during the first three months of 1974, partly due to a decline in the market value of government securities, which had been acquired with a view to realization of a profit when interest rates declined, but which then fell in value when interest rates increased. By the end of March those losses together with others had swelled to approximately $7 million. The loss was concealed to the extent of about $5 million by falsely showing FNB-owned securities as worth more than the prices at which they should have been carried. The balance of the loss was concealed by having FNB engage in four fictitious foreign exchange transactions with European banks controlled by Sindona and his colleague Carlo Bordoni, who at Sindona's request had served as a director of the holding company, Franklin New York Corporation, which controlled FNB. These bogus transactions made it appear, by using fictitious exchange rates, that FNB had a $2.2 million unrealized profit when in fact its foreign exchange department had suffered a loss.

The false evaluation of securities was accomplished in part by backdating two transfers of government bonds from FNB's bond trading account to its investment account at inflated prices and by one such transfer of municipal and corporate securities at prices which had not been reduced to show losses in value. Securities in the bank's trading account, having been acquired for resale, were required to be carried at the lower of cost or market value, which was computed by determining the value of each security so held at the end of each month. Securities held in FNB's investment or portfolio account, on the other hand, were carried at cost with a straight line adjustment to amortize premiums or discounts. Upon transfer of a security from the bank's trading to its investment account, the bank was required to value the security at the lower of cost or market value on the date of transfer.

On March 26, 1974, Luftig, FNB's President, faced with mounting losses on the part of the bank, learned this evaluation rule from John Sadlik, FNB's chief financial officer, and asked Sadlik whether such a transfer could be backdated if instructions previously given to make the transfer had not been executed. After checking with Cornell Wright of Ernst & Ernst, FNB's independent certified public accountants On March 27, 1974, according to the testimony of Howard D. Crosse, the bank's Vice-Chairman in charge of its Investment Division, Luftig advised Crosse that if Ernst & Ernst could be convinced that the claimed instruction to transfer the securities had been given on March 8th it would not object to the bank's evaluating the securities as of March 11, 1974, and asked Crosse in substance to assist in making this possible and falsely to tell Wright that the instruction had been given. As Crosse left the room, he first noticed Gleason standing in the doorway. Gleason patted him on the shoulder and said, "Good luck." At a meeting with Wright and Sadlik later the same day, after initial documentation proved unacceptable to Ernst & Ernst, Luftig falsely stated to Wright that the instruction had been given by him earlier in March and prepared a confirmatory memorandum.

Sadlik responded that backdating was permissible if there was documentary verification of the earlier instructions. Luftig then advised Sadlik that he had documentation showing that instructions had been given on March 8, 1974, to transfer $100 million in United States Treasury certificates from the bank's trading to its investment account. The market value of these securities on March 11, 1974, the next business day after March 8th, had been approximately $2 million higher than their value on March 26. Sadlik thereupon arranged for Wright to visit the bank on March 27 in order to verify the documentation of the March 8th instruction which Luftig represented he had given.

On the following day, March 28, at a meeting with Sadlik, Wright and a more senior Ernst & Ernst partner, James Russell, Crosse corroborated Luftig's fraudulent representation by falsely confirming that he had been instructed by Luftig in early March to make the transfer and had relayed the instruction to Carter. The failure to carry out the instruction was then explained to Wright and Russell by J. Michael Carter, the bank's Senior Vice-President in charge of its Investment Division, who falsely told them that the transfer had not been made because he had in effect misunderstood the earlier instruction as one to liquidate rather than to make a transfer between accounts. ⁶ Crosse added support to this explanation by furnishing to Ernst & Ernst his own handwritten memorandum falsely summarizing directions supposedly given to him by Luftig in early March and stating that the failure to execute them had only just been discovered.

Relying upon these false representations Ernst & Ernst did not object to the bank's March 29 transfer of the $100 million in Government securities to its investment account at March 11 market values, which enabled FNB...