964 F.2d 193 (3rd Cir. 1992), 91-1792, United States v. Pelullo

Docket Nº:91-1792.
Citation:964 F.2d 193
Party Name:UNITED STATES of America v. Leonard A. PELULLO, Appellant.
Case Date:May 12, 1992
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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964 F.2d 193 (3rd Cir. 1992)

UNITED STATES of America

v.

Leonard A. PELULLO, Appellant.

No. 91-1792.

United States Court of Appeals, Third Circuit

May 12, 1992

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

Argued April 7, 1992.

As Amended May 18, 1992.

Rehearing Denied July 27, 1992.

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John W. Nields, Jr., W. Neil Eggleston (argued), Richard A. Ripley, Diane B. Heller, Howrey & Simon, Washington, D.C., for appellant.

Michael M. Baylson, U.S. Atty., Joel M. Friedman, Ronald G. Cole (argued), Frank A. Labor, III, Asst. U.S. Attys., Organized Crime Strike Force, Philadelphia, Pa., for appellee.

Before: GREENBERG and SCIRICA, Circuit Judges, and DEBEVOISE, District Judge [*].

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OPINION OF THE COURT

GREENBERG, Circuit Judge:

Leonard A. Pelullo appeals from a judgment of conviction entered in the United States District Court for the Eastern District of Pennsylvania following a three-week jury trial. The jury convicted Pelullo of 49 counts of wire fraud in violation of 18 U.S.C. § 1343, and one count of racketeering under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(c) and 1963. He was, however, acquitted of five additional counts of wire fraud. On August 30, 1991, Pelullo was sentenced to a term of 24 years' imprisonment, assessed $4,400,000 in fines, and ordered to pay restitution of $2,071,000 and $114,000.

On appeal, Pelullo argues that the district court erred in: (1) failing to conduct an adequate charge conference under Fed.R.Crim.P. 30; (2) charging RICO's "pattern of racketeering activity" and "enterprise" elements; (3) charging on the wire fraud counts as the charge permitted the jury to convict Pelullo for violating his civil fiduciary duties; (4) ruling on the statute of limitations defense to the wire fraud counts; (5) admitting inadmissible bank documents without proper foundation in evidence; (6) admitting inadmissible summaries under Fed.R.Evid. 1006; (7) preventing him from attacking the credibility of government witnesses in summation; and (8) admitting crucial hearsay testimony of an informant, Philip Leonetti.

We find that the court permitted a substantial amount of hearsay in the form of bank documents and summaries prepared by an FBI agent, Randall Wolverton, to be admitted at trial even though the Government failed to satisfy any of the hearsay exceptions justifying its admission. Because we cannot conclude that the admission of this evidence was harmless, we will reverse the judgment of conviction and remand for a new trial on all counts except count 54, a mail fraud count, on which we are satisfied that any error was harmless. We also conclude that the court erred in charging the jury under RICO with respect to the "pattern of racketeering activity" and "enterprise." Although these errors as well as other errors in other matters which we also consider either may have been or were harmless, since the issues involved are likely to resurface on remand we will address them as well. Of course, we also consider the statute of limitations issues, as a ruling on that point in favor of Pelullo could bar a retrial on the wire fraud counts.

I.

BACKGROUND 1

We set forth the evidence at length as this is required for an understanding of this case, our description being from a view of the evidence in a light favorable to the Government as the verdict winner. The indictment charged Pelullo with engaging in a pattern of illegal racketeering activity by abusing his position as chief executive officer of The Royale Group, Limited ("Royale"), a publicly held corporation. In the fall of 1983, Royale, through wholly owned subsidiaries, acquired six "art deco" hotels in Miami Beach, Florida: the Cardozo, the Victor, the Senator, the Leslie, the Carlyle and the Cavalier. In June 1984 the hotels obtained a $13.5 million loan from FCA Mortgage Corporation ("FCA Mortgage"), a wholly owned subsidiary of American Savings and Loan Association ("American"). Approximately $10 million of the loan was earmarked for acquisition costs, while the remaining $3.5 million was to be used for renovation. The loan was increased twice, by $2.2 million in January 1985 and $1.4 million in September 1985. By September 1985, $6.2 million of the loan proceeds was to be used for renovation. Under the agreement, American retained this portion of the loan and would disburse funds as the renovation costs were incurred. To obtain a disbursement, Royale

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was required to submit draw requests setting forth a certified itemization of these costs.

The indictment charged Pelullo with three fraudulent schemes. First, the Government alleged that Pelullo defrauded American, Royale and Royale's shareholders of approximately $1.6 million by submitting false documentation in connection with certain draw requests on the project. This scheme is reflected in wire fraud counts 1 through 53 and racketeering acts 1 through 59 of count 55, the RICO count, which referred to the same transfers as those in the wire fraud counts, as well as several additional transfers. The second scheme, reflected in wire fraud count 54 and RICO racketeering act 60, involved Pelullo's defrauding Royale of $114,000 in February 1986 by diverting cash from one of its subsidiaries to repay a debt Pelullo owed to a loanshark connected with the Philadelphia mafia. The third scheme, which is reflected only in racketeering acts 61-72, and not in individual wire fraud counts, charged Pelullo with defrauding Royale of approximately $500,000 by diverting money for uses other than the purposes of the loans that American had loaned to Royale.

Under the terms of the loan Royale was permitted to draw loan money to pay for so-called "hard costs" associated with the renovation work, such as labor, materials and supplies. Pelullo, who certified most of the draw requests, overstated the renovation costs and submitted false documentation upon which American relied to support these costs.

Pelullo directed the bank to transfer the disbursements by wire transfers to Delta Development and Construction Corporation ("Delta"), a company owned and controlled by Pelullo or his family, which acted as general contractor for the renovation project. He thereupon diverted the proceeds for his personal use through various corporations he owned and controlled. Some of the proceeds were used to purchase or run two farms in Chester County, Pennsylvania; to purchase a sheep ranch in Montana; for operating corporations set up to run restaurants in the Philadelphia area; and to repay a loan on behalf of his father. In addition, $100,000 of the loan was converted to cash and delivered to Pelullo at a casino in Puerto Rico.

Pelullo's intentional failure to disclose to Royale's board of directors information pertaining to the use of the loan proceeds was a significant theme throughout the Government's case. The Government introduced evidence that Pelullo failed to maintain adequate financial records of the renovation costs and disbursements, withheld financial records from Royale's independent auditors, and delayed filing financial disclosure reports required by the Securities and Exchange Act of 1934. The Government maintained that, if Royale had kept proper accounting records, the Royale board and its shareholders would have known exactly how Pelullo was using its money.

For example, the evidence showed that Pelullo prevented Royale's outside auditors from viewing bank records of Delta and other related corporations. When Touche Ross & Company, Royale's public accountants, advised Pelullo that it could not certify Royale's financial statements without these records, Pelullo fired Touche Ross. Coopers & Lybrand replaced Touche Ross, but then withdrew from Royale's audit after Pelullo similarly refused to disclose documents relating to the renovation costs for the hotels.

Additionally, several witnesses testified regarding Pelullo's failure to act in accordance with his responsibilities as a corporate officer. One, Professor John C. Coffee, Jr., testified as to the fiduciary duties imposed on corporate officers by state corporation law and federal securities law.

Agent Wolverton's testimony was very significant in establishing that there were fraudulent wire transfers. He traced Pelullo's diversion of funds by an analysis of subpoenaed bank records of Royale, Delta and other Pelullo-controlled companies. His analysis was also based on numerous interviews he conducted over the course of his investigation. Wolverton concluded that Pelullo diverted loan proceeds of

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$1,603,894.71 through the first scheme and $471,500 through the third scheme. The first scheme related to loan proceeds earmarked for "hard costs," i.e. actual renovation work, while the third scheme related to "soft costs," i.e. overhead and administrative expenses. Agent Wolverton prepared summaries of the diversions, which were admitted as Government exhibits over Pelullo's objections.

The evidence with respect to the second scheme showed that Pelullo obtained a personal loan from one Anthony DiSalvo. When Pelullo failed to repay the loan, DiSalvo sought the assistance of Philip Leonetti and Nicodemo Scarfo, respectively the underboss and boss of the Philadelphia mafia. After meeting with Leonetti and Scarfo, Pelullo diverted $114,000 from a bank account of Palm Beach Heights Development Corporation ("PBH"), another Royale wholly owned subsidiary. The funds were then wired to a corporation in Philadelphia and, on February 25, 1986, were converted to cash and delivered to DiSalvo. Leonetti, a government informant, testified that Pelullo paid $90,000 in cash to DiSalvo around the time of the $114,000 wire transfer. At trial, Pelullo did not...

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