U.S. v. Morris

• Decision Date: 01 May 1996
• Docket Number: Nos. 94-2740,94-2741,s. 94-2740
• Citation: 80 F.3d 1151
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Edward L. MORRIS and Steven M. Gardner, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1151

80 F.3d 1151

UNITED STATES of America, Plaintiff-Appellee, v. Edward L. MORRIS and Steven M. Gardner, Defendants-Appellants.

Nos. 94-2740, 94-2741.

United States Court of Appeals Seventh Circuit.

Argued June 2, 1995.

Decided April 2, 1996.

Rehearing and Suggestion for Rehearing En Banc Denied May 1, 1996.

Appeals from the United States District Court for the Southern District of Illinois, East St. Louis Division. No. 92 CR 30144--William L. Beatty, Judge.

Bruce E. Reppert (argued), Suzanne M. Wissmann, Office of U.S. Atty., Criminal Division, Fairview Heights, IL, for U.S.

J. William Lucco, Lucco, Brown & Mudge, Edwardsville, IL, Sheldon T. Zenner, Ted S. Helwig, Robert K. Niewijk (argued), Katten, Muchin & Zavis, Chicago, IL, Samuel C. Ebling, St. Louis, MO, for Edward L. Morris.

David H. Baris, Victor Simon, Kennedy & Baris, L.L.P., Washington, DC, for American Association of Bank Directors.

Steven S. Zaleznick, Deborah M. Zuckerman, Dorothy Siemon, American Association of Retired Persons, Washington, DC, for American Association of Retired Persons.

David M. Fahrenkamp, Edwardsville, IL, Michael Dwyer (argued), Office of the Federal Public Defender, Lincoln, NE, for Steven M. Gardner.

Before CUMMINGS, KANNE, and ROVNER, Circuit Judges.

IIANA DIAMOND ROVNER, Circuit Judge.

The defendants in this mail and wire fraud prosecution are former officers of Germania Bank, a St. Louis-based savings and loan association. After a lengthy trial, a jury convicted the bank's former chief executive officer, Edward L. Morris, and its former chief operating officer, Steven M. Gardner, on two counts of mail (18 U.S.C. § 1341) and one count of wire fraud (18 U.S.C. § 1343) in connection with Germania's $10 million offering of subordinated capital notes ("Schnotes") between October 1987 and March 1988. ¹ The district court sentenced Morris and Gardner to prison terms of forty-six months, but stayed those sentences during the pendency of their appeals. In challenging their convictions, Morris and Gardner argue that the government's evidence at trial was insufficient to establish violations of the mail and wire fraud statutes and, alternatively, that they are entitled to new trials due to the government's failure to produce exculpatory evidence under Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963). Defendants also challenge the sentences they received under the Sentencing Guidelines, contending that the district court erred in calculating the amount of loss attributable to their fraud under U.S.S.G. § 2F1.1(b)(1), and in refusing to depart downward from their sentencing range to account for other alleged causes of that loss. For the reasons that follow, we affirm defendants' convictions and sentences.

I.

Prior to the deregulation of the savings and loan industry in the early 1980s, Germania had primarily been involved in residential real estate loans. After deregulation, however, the bank expanded its loan portfolio, involving itself in larger multi-family residential and commercial projects. This case involves problems that developed in the bank's loan portfolio in 1986 and 1987, and particularly the bank's decisions in taking and in failing to take loss reserves on that portfolio. ² The crux of the government's case is that the Executive Committee of Germania's Board of Directors failed to approve an additional $9.3 million in loan loss reserves recommended by bank management in September 1987 pursuant to an in-depth quarterly review of the bank's loan portfolio (the "September Analysis" or "SA"). The government maintained that the recommended reserves were rejected not because the Executive Committee decided they were unnecessary, but because Germania was about to embark on the $10 million Schnote offering and its controlling shareholder insisted that the bank show a profit for the quarter ending September 30, 1987. Because the reserves recommended by management would have caused a significant third-quarter loss, the Executive Committee authorized only those reserves necessary to cover identified losses in the portfolio, with gradual increases to follow over time. Germania then proceeded with the Schnote offering, using an offering circular that described current loan loss reserves as "adequate." It is management's dissemination of this offering circular to potential investors that is at the heart of the government's mail and wire fraud charges.

Almost five months after the Schnote offering began, Peat, Marwick, Main & Co. ("Peat Marwick"), in connection with its year-end audit of Germania's financial statements, recommended loan loss reserves of a magnitude similar to those recommended by management in the September Analysis. Germania eventually took an additional $9.4 million in reserves in February 1988, near the conclusion of the Schnote offering. The bank's financial condition deteriorated from that point, and it was finally placed in conservatorship by the Resolution Trust Corporation (the "RTC") in June 1990. With Germania's demise, the Schnotes became worthless, and investors recouped nothing on their investments.

The evidence presented through a multitude of witnesses to the jury in this case was replete with contradictions. ³ The most numerous and significant concerned the nature and purpose of the SA, as well as the substance of the Executive Committee's discussion of its recommendations. Mindful that Morris and Gardner primarily raise a sufficiency challenge to the evidence supporting their convictions, we must resolve such conflicts in the evidence as the jury apparently resolved them--in the government's favor. We thus describe in somewhat abbreviated form below the evidence presented at trial as construed in the light most favorable to the government. See United States v. Biesiadecki, 933 F.2d 539, 545 (7th Cir.1991).

A.

The government's case depended heavily upon the testimony of Jimmy Wayne New, a former bank officer who pled guilty to his role in the Schnote offering and agreed to cooperate with the government. New served as the bank's chief financial officer during the relevant time period and was a member of its Executive Committee. New was therefore present, along with Morris and Gardner, at the central meeting that concerns us here. Before discussing that meeting, however, we describe the events preceding it that apparently prompted management's decision to compile the in-depth analysis of the bank's loan portfolio that came to be known as the September Analysis.

Approximately one year before the Schnote offering, Germania conducted a public offering of its stock. Before the offering began, however, Morris became concerned about the bank's loan portfolio and the adequacy of its allowance for loan losses. Morris therefore decided to postpone the stock offering to allow for further investigation. New was on vacation in Mexico at the time, and Morris called him there to tell him that the offering would be postponed. Morris explained that in the course of inspecting certain properties that were the subject of Germania loans, he had become concerned about the level of the bank's reserves. Morris wanted a complete analysis of the bank's loan portfolio compiled before he would proceed with the public stock offering. When New returned from his vacation, he oversaw an in-depth inspection of a large segment of the bank's loan portfolio. As a result of that investigation, Germania took additional reserves, disclosed those reserves in the offering circular, and then proceeded with the stock offering. The 1986 stock offering eventually raised in excess of $5 million, but the per share price was lower than Germania had expected prior to taking the additional reserves.

In February 1987, the bank's auditors issued their report on Germania's financial statements for the year ending December 31, 1986. In connection with that report, Peat Marwick sent a "management letter" to Germania's Board of Directors expressing concern about the bank's control over its loan portfolio:

During our review of large loans, we noted no documentation evidencing ongoing monitoring of several large commercial loans. As noted in our prior year management letter, this practice exposes the Association to the risk that it may not become aware of declines in collateral value or other problems until a loan becomes delinquent. Subsequent to year-end, the Association has implemented a system to review selected large loans on an annual basis. We recommend strict adherence to this policy. In addition, we recommend that non-real estate commercial loans be reviewed on at least a quarterly basis, and that current financial data be obtained and reviewed in connection with this ongoing review. For both types of commercial loans, we recommend that loan files contain documentation of the ongoing review and monitoring procedures performed, including the conclusions as to whether any action by the Association is required.

(Govt.Ex. 27.) The management letter recommended that the bank determine "the adequacy of its allowance for loan losses on a quarterly basis." (Id.)

Germania's Audit Committee and its Board of Directors reviewed in a June 18, 1987 meeting the recommendations made in Peat Marwick's management letter. The Board then responded to the concerns of its auditor in a letter to the Federal Home Loan Bank of Chicago ("FHLB"), which had federal regulatory authority over Germania:

Subsequent to year-end, management of the Association and representatives of Peat, Marwick, Main & Co. developed procedures to determine the adequacy of the Association's allowance for loan losses in response to recent accounting and SEC literature. The analysis attempts to classify the Association's portfolio into three categories (1) not a problem, (2) potential problem, and (3) high risk. Management of the Association, on a quarterly basis, will utilize this classification to assign a probable loss for loans included in...