U.S. v. Smith

• Decision Date: 04 December 1989
• Docket Number: Nos. 88-3168,88-3185 and 88-3189,s. 88-3168
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jerry D. SMITH, Paul D. Smith, and G. Michael Kirchoff, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 703

891 F.2d 703

UNITED STATES of America, Plaintiff-Appellee, v. Jerry D. SMITH, Paul D. Smith, and G. Michael Kirchoff,

Defendants-Appellants.

Nos. 88-3168, 88-3185 and 88-3189.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 26, 1989.

Decided Dec. 4, 1989.

William J. Hardy and Hiram C. Eastland, Jr., Eastland & Hardy, Washington, D.C., for appellant Jerry D. Smith.

Greg M. Devlin, Gordon, Hipperson, Shogan & Devlin, Spokane, Wash., for appellant Paul D. Smith.

Terrence Kellogg, Seattle, Wash., for appellant G. Michael Kirchoff.

John C. Carver and Kurt P. Hermanns, Asst. U.S. Attys., Seattle, Wash., for appellee.

Appeal from the United States District Court for the Western District of Washington.

Before FARRIS, NOONAN, and LEAVY, Circuit Judges.

NOONAN, Circuit Judge:

G. Michael Kirchoff, Jerry D. Smith, and Paul D. Smith appeal their convictions of various crimes in connection with the defrauding of Queen City Savings and Loan Association (the Savings and Loan). We affirm the conviction of all three defendants.

PROCEEDINGS

1. The Indictment

The two Smiths, who are brothers, Kirchoff and J. Kip Boyd, were charged in count 1 with a conspiracy with four objectives: to defraud the United States and its agency, the Federal Home Loan Bank Board (the Bank Board) by obstructing the Bank Board's function of safeguarding the integrity of the Savings and Loan; to carry out wire fraud upon the Savings and Loan and its wholly-owned subsidiary, Queen City Inc. (QCI); to make false statements to influence the Savings and Loan; and to make false entries on its books and those of QCI, all with the purpose of obtaining money for the Smith brothers, their families and businesses, in violation of 18 U.S.C. § 371.

Counts 2 to 10 charged the Smiths and Kirchoff with specific acts of wire fraud; count 11 charged these defendants and Boyd with a specific act of wire fraud, in violation of 18 U.S.C. §§ 1343 and 2. Count 12 charged the Smiths with making a false statement to the Savings and Loan in submitting the fraudulent balance sheet of a Smith-controlled company, Can-Am International, Inc. (Can-Am), in violation of 18 U.S.C. §§ 1014 and 2. Count 13 charged the Smiths with making a false statement relating to Can-Am's subordination of a loan from its stockholders, in violation of the same statutes. Id. Count 14 charged Kirchoff with making a false entry in the books of the Savings and Loan and QCI, in violation of 18 U.S.C. § 1006 by filing a Borrower's Certification he knew was false, and charged the Smith brothers with aiding and abetting the commission of that offense, in violation of 18 U.S.C. § 2. Count 15 charged the Smiths with a false statement to the Savings and Loan and QCI as to the purchase price of real estate offered as security for one of the loans of the Savings and Loan, in violation of 18 U.S.C. §§ 1014 and 2. Count 16 charged the Smiths, Kirchoff and Boyd with a false statement as to the value of another piece

of real estate offered as security, in violation of the same statutes.

2. The Trial

The defendants went on trial February 9, 1988. At the conclusion of the government's case-in-chief the district court granted Boyd's motion for a judgment of acquittal. On March 25, 1988, after a trial of seven weeks, the case as to appellants was submitted to the jury, which returned a verdict on April 7, 1988. Paul Smith was convicted on count 14 and acquitted on the other counts with which he was charged. Kirchoff was acquitted on counts 3, 9, 11 and 16 and convicted of conspiracy as charged in count 1, wire fraud as charged in counts 2, 4, 5, 6, 7, 8, and 10 and making a false entry as charged in count 14. Jerry Smith was acquitted on count 13 and convicted of all the other counts with which he was charged.

The district court sentenced Paul Smith to five years probation, Kirchoff to two years imprisonment on each count with the sentences to run concurrently, and Jerry Smith to five years of imprisonment on count 1; to five years of imprisonment on each of counts 2 through 11 and 14, these terms of imprisonment to run concurrently with each other and consecutive to the term of imprisonment for count 1; and to two years of imprisonment on each of counts 12, 15 and 16, these terms to run concurrently with each other and with the terms of imprisonment imposed as to counts 2 through 11 and 14. Jerry Smith was ordered to make restitution to the Federal Savings and Loan Insurance Corporation (FSLIC) in an amount to be determined by the court.

From the judgments of conviction all three defendants appeal.

FACTS

The Savings and Loan was a state-chartered institution that had done business in Seattle since 1964. Its accounts were insured by FSLIC. By March 1982, it was in serious trouble, plagued by high interest rates on money borrowed and by many loans in default. At this gloomy time Jerry Smith appeared on its horizon.

Jerry Smith had been a highly successful financial operator. In his heyday, 1978-1979, his net worth was between $50 million and $90 million. However, in 1980 his mortgage company in Eastern Washington had collapsed, leaving him in substantial debt. He had plans for making a comeback. The plans included the Savings and Loan. Paul Smith, a builder, was his brother's serviceable tool.

In the Spring of 1982 Jerry Smith presented himself as a potential large borrower from the Savings and Loan and then as a potential purchaser of the institution. In fact he did not have the resources to buy it, but he had a pliable client, a wealthy Canadian investor, Henry J. Block. By May 1982, Smith had persuaded Block to make an offer for the stock of the Savings and Loan. The offer was accepted by the stockholders in June 1982 and Block received approval as the purchaser from the state and federal regulators in the fall of 1982. Smith managed to create the illusion at the Savings and Loan that he and Block had an identical interest.

During the time between Block's tender offer and his taking control, Smith attended board meetings of the Savings and Loan and gave substantial direction as to how to solve its financial problems. He gave the impression to various persons at the Savings and Loan and to those dealing with it that he was in effect the real purchaser of the stock. For example, Smith informed Donald J. Hess, the President of the Savings and Loan, that he eventually would own 50 or 51 percent of the stock that Block acquired. Through the influence he exerted in this fashion and in particular through his influence on Kirchoff, Smith was enabled to carry out his plan of getting money out of the Savings and Loan.

Kirchoff had for many years been the senior vice president of the largest state-chartered thrift in the state of Washington. Because of his experience and expertise, he had been employed by the Federal Home Loan Bank of Seattle in 1980 and 1981 to teach courses in appraisal and underwriting With Smith's help Kirchoff began to run the business of QCI and on July 1, 1982 after Block's offer had been accepted, Kirchoff was made president of QCI. He negotiated his salary with Olin Loomis, the chairman of the Savings and Loan and with Jerry Smith. Kirchoff was given a salary higher than that of Hess even though according to Loomis the institution was "not used to that type of salary."

                techniques.   He had recently served as a director of Security Savings, a financial institution owned by Smith.   In March 1982 he was hired by the Savings and Loan as a consultant to package and sell the properties the institution had acquired as a result of defaulted loans
                

According to Hess, the president of the Savings and Loan, loans arranged through QCI had two features especially attractive to the Savings and Loan: Although QCI was the wholly-owned subsidiary of the Savings and Loan, QCI itself was a mortgage company and, according to Hess, therefore less regulated than the Savings and Loan; and although QCI was a subsidiary, when the Savings and Loan "bought" the loan from it, the Savings and Loan would treat the loan fee owed by the borrower as realized income. The Savings and Loan showed an instant profit, even though the borrower might default and leave the Savings and Loan with a loss. The availability of this accounting trick, apparently not objected to by certified public accountants at the time, operated as an inducement to the Savings and Loan to use QCI and Kirchoff and blinded it to the risks of deception and fraud. Although transactions between a savings and loan association and its affiliate are subject to regulation by the Bank Board under 12 C.F.R. § 584.3, neither the federal regulators nor the state regulators appear to have scrutinized these transactions between QCI and the Savings and Loan carefully.

The Can-Am Scheme. With Kirchoff as an inside man and Smith involved both as an advisor and as a borrower, the plan to milk the Savings and Loan unfolded. On March 4, 1982 Smith had arranged the incorporation in Texas of Can-Am with a capital of $1,000. The principal stockholders were his brother Paul and one Paul Roper, who managed the financial affairs of Block. Jerry Smith arranged for Can-Am to apply to the Savings and Loan for a loan to buy and develop property in the Midland-Odessa area of Texas. The terms were highly favorable to the Savings and Loan. The balance sheet of Can-Am presented to the Savings and Loan, after being signed by Paul Smith on May 20, 1982, showed its principal assets as $950,500 in cash and $2,076,650 as work in progress. Its principal liability was $1 million payable to its stockholders. The $1 million was described by Kirchoff as a loan from Can-Am stockholders. The Savings and Loan requested that the loan be subordinated to the loan the Savings and Loan would make. Paul Smith signed such an agreement--a Priority Agreement and Indemnity--but Roper did not. The Priority Agreement was fraudulent. Paul Smith and Block were...