U.S. v. Morgenstern

Decision Date17 March 1988
Docket Number87-5548,Nos. 87-5447,s. 87-5447
Citation842 F.2d 333
PartiesUnpublished Disposition NOTICE: Sixth Circuit Rule 24(c) states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Sixth Circuit. UNITED STATES of America, Plaintiff-Appellee, v. David Alan MORGENSTERN and Frederick Earl Morgenstern, Defendants-Appellants.
CourtU.S. Court of Appeals — Sixth Circuit

Before LIVELY, Chief Judge, NATHANIEL R. JONES and BOGGS, Circuit Judges.

PER CURIAM.

David A. Morgenstern and Frederick E. Morgenstern were convicted after a jury trial of ten counts of willfully causing to be misapplied more than seven million dollars of the moneys, funds and credits of the Claiborne County Bank in Tazewell, Tennessee, with intent to injure or defraud the bank, in violation of 18 U.S.C. Secs. 656 and 2 (1982), and ten counts of transporting or causing to be transported in interstate commerce securities having the value of more than $5,000, knowing them to have been stolen, converted or taken by fraud, in violation of 18 U.S.C. Secs. 2314 and 2 (1982). The defendants were also convicted of one count of conspiracy to commit these substantive offenses, in violation of 18 U.S.C. Sec. 371 (1982). After considering the Morgensterns' contentions for reversal, we affirm the convictions.

I

The Morgensterns' principal contention on appeal is that there was insufficient evidence to convict them of the crimes charged. In reviewing the sufficiency of the evidence to support a criminal conviction, we view the evidence in the light most favorable to the government. Jackson v. Virginia, 443 U.S. 307, 319 (1979). The government must be given the benefit of all inferences which can reasonably be drawn from the evidence. United States v. Adamo, 742 F.2d 927, 932 (6th Cir.1984) (and cases cited therein), cert. denied sub nom. Freeman v. United States, 469 U.S. 1193 (1985). "Circumstantial evidence is intrinsically as probative as direct evidence and may be the sole support for a conviction." United States v. Newton, 756 F.2d 53, 54 (8th Cir.1985).

At the center of this case is the Claiborne County Bank located in Tazewell, Tennessee. 1 According to its president, Robert Barger, the bank is a small, family-owned institution which is insured by the Federal Deposit Insurance Corporation. During the events in question, the bank's executive vice president and cashier was Ruth Bailey, a 37-year veteran of the institution. Bailey, a central figure in this case, held ten percent of the bank's stock and was one of its directors. She had authority to issue cashier's checks and wire transfers, but her loan authority was limited to $50,000.

Bailey first met the Morgensterns sometime in 1980. David and Fred Morgenstern were involved in various coal-related businesses, including the operation of mines in Kentucky and Tennessee. By January 1980, the Morgensterns' activities were operated through several corporations, including Resource Trade Corporation, Minerals and Resources Corporation, Transcoal Corporation and S.A.M. Corporation. Eventually, the defendants incorporated Financial Reserve Corporation, to integrate vertically all of the mining and processing functions into one company.

In early 1980, the Morgensterns moved most of their banking to the Claiborne County Bank, opening 21 accounts between March 1980 and February 1981. Ruth Bailey was in charge of the Morgensterns' accounts. At the time, the defendants informed the bank's officials that they would need to draw on uncollected funds; that is, they would need immediate credit for checks deposited in an account. The bank agreed and opened a special escrow account for uncollected checks. Any checks returned for uncollected funds were posted to this account.

In March 1980, the bank provided the Morgensterns with a $200,000 line of credit to cover uncollected funds. By the fall of 1980, however, the defendants' companies were having serious financial problems and the relationship with the bank began to sour. According to President Barger, there was a continuous problem of checks being returned because of uncollected funds. Consequently, on November 18, 1980, the bank decided that it would not allow the Morgensterns to draw on uncollected funds, unless there were sufficient funds in their accounts at the bank to cover the checks or there was verification that the checks were written on available funds.

Because, by the end of 1980, the Morgensterns' financial woes did not improve, Fred Morgenstern was forced to ask Ruth Bailey on four occasions for personal loans to meet the companies' payrolls. Between November and December 1980, Bailey personally loaned some $24,000, which was eventually repaid.

On January 12, 1981, the Morgensterns applied for a $960,000 loan from the bank. Their request was denied because, by this time, the defendants owed the bank some $364,000 due to uncollected checks. However, in February 1981, the bank did make a secured loan for $250,000.

In response to their continued need for funds, the Morgensterns devised a check-kiting scheme to defraud the bank of its funds. The check-kiting scheme was carried out during February 1981 and involved 21 bank accounts, eight of which were at the Claiborne County Bank. According to Danny Garnett, special agent for the Federal Bureau of Investigation, the Morgensterns had a beginning balance in these 21 accounts of $393,523. During February 1981, they also deposited $1,010,153 into these accounts from legitimate outside sources, including the $250,000 loan from the bank in February. They thus had a total of $1,403,676 in the 21 accounts. Garnett testified that, during this same period, the Morgensterns distributed the sum of $2,758,412 from these accounts to outside parties, such as creditors.

Based on the above figures, these accounts should have shown a debit, but they did not. The defendants were able to prevent this by causing Ruth Bailey to wire transfer $5,968,942 of the bank's own funds to the Morgensterns' accounts at the other banks. For example, between February 2-24, 1981, Bailey made 21 wire transfers for a total sum of $4,700,642 from the bank to a Morgenstern account at the Citizens Bank of Pikeville, in Pikeville, Kentucky. As payment for these wire transfers, the defendants generally gave Bailey checks written on their accounts at the bank; these checks were not covered by sufficient funds. In some instances, instead of checks, the Morgensterns had their accounts at the bank debited for the wire transfers.

During this series of transactions, David Morgenstern drew 22 checks totalling $4,744,387 from an account at the Citizens Bank of Pikeville and deposited them into the Resource Trade Corporation account at the Southeast Bank of Jacksonville, in Jacksonville, Florida. He then wrote checks on this Florida account and deposited them into the defendants' accounts at the Claiborne County Bank. Between February 20-28, 1981, David Morgenstern wrote 20 checks totalling approximately seven million dollars on the defendants' account at the Southeast Bank of Jacksonville and deposited them into the Claiborne County Bank.

Between February 10-26, 1981, the Morgensterns had Bailey issue to them 14 cashier's checks drawn on the bank's funds, totalling $4,440,275. According to Bailey, the Morgensterns needed these cashier's checks because they were experiencing financial problems, they had written more checks than they had funds to cover, and they were having problems clearing funds. Ten of these cashier's checks formed the basis for the counts in the indictment for which the defendants were convicted. The Morgensterns paid for these ten cashier's checks with checks drawn on accounts at the bank. Special Agent Garnett testified that there were insufficient funds in these accounts to cover these checks.

The Morgensterns deposited the cashier's checks in various banks in Florida and Georgia. Cashier's check No. 66184, dated February 23, 1981, is illustrative. This check for $100,000 was payable to Minerals and Resources Corporation. Issued in exchange for a check written on insufficient funds, it was deposited into a Morgenstern account at the Peachtree Bank in Chamblee, Georgia.

The Morgensterns' financial ventures began to crumble when the Claiborne County Bank sought payment from the Southeast Bank of Jacksonville for the seven million dollars worth of checks drawn on the latter bank. The Florida bank returned these checks as being written on uncollected funds. Claire Skidmore, of the Southeast Bank of Jacksonville, testified that if the checks had been returned again by the Tazewell bank, her bank would have refused to pay them.

Brenda Snodgrass, head bookkeeper of the Claiborne County Bank, first became aware of the returned checks around February 26, 1981. She testified that, as the checks were returned to the bank, she would check the Morgensterns' accounts to see what funds they had available to cover them. By March 4 or 5, 1981, the bank froze all of the defendants' accounts.

By the beginning of March 1981, the bank was on the verge of becoming insolvent due to the returned checks. Bailey was removed from her position with the bank, and Robert Barger took control of the accounts. The returned checks were posted to the escrow account, and the bank sought any available funds to offset the uncollected debt. Additionally, the Morgensterns began wiring funds and transmitting cashier's checks to the bank in an effort to offset uncollected items. After the bank took other curative measures to recoup its losses, including a fidelity bond claim on Ruth Bailey for $1,675,000, it lost approximately $2,220,621.

On February 6, 1986, a grand jury returned a twenty-nine count indictment against the Morgensterns and a third individual who was subsequently dismissed from the case. The...

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