Brandom v. United States

• Decision Date: 29 September 1970
• Docket Number: No. 17276-17278.,17276-17278.
• Parties: Smith F. BRANDOM, Jr., Kenneth Belling and Michael Gilboy, Petitioner-Appellants, v. UNITED STATES of America, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

431 F.2d 1391 (1970)

Smith F. BRANDOM, Jr., Kenneth Belling and Michael Gilboy, Petitioner-Appellants, v. UNITED STATES of America, Respondent-Appellee.

Nos. 17276-17278.

United States Court of Appeals, Seventh Circuit.

June 30, 1970.

As Amended on Denial of Rehearings September 29, 1970.

H. George Lafferty, Kansas City, Mo., Earl A. Charlton, Gaar W. Steiner, Charlton, Yanisch, Greco & Roffa, Milwaukee, Wis., for Kenneth Belling, for petitioners-appellants.

David J. Cannon, U. S. Atty., Robert J. Lerner, Special Asst. U. S. Atty., Milwaukee, Wis., for plaintiff-appellee.

Before KILEY and CUMMINGS, Circuit Judges, and WILL, District Judge.

WILL, District Judge.¹

Appellants Kenneth Belling, Smith F. Brandom and Michael Gilboy, were indicted on a number of individual counts under 18 U.S.C. § 1341 for unlawfully using the mails to defraud and on a single conspiracy count. The indictment charged appellants with devising a scheme to defraud persons desirous of obtaining insurance coverage in an established, financially sound, mutual insurance company, by misrepresenting the financial condition of that company to policy holders and others. The government also charged specific fraudulent acts which related to defendant-appellants' management of Market Mens Mutual Insurance Company by virtue of their control of Market Mens Management Agency. Defendants were tried by a jury and found guilty.² Prison terms were not imposed on any defendant. Instead, all defendants were fined and placed on probation.³

The factual background is briefly as follows. Market Mens Mutual Insurance Company (Mutual) was at all relevant times a Wisconsin mutual insurance company, organized in 1917 and licensed to do business in some thirteen middle-western states. By 1958, Mutual was in a seriously impaired financial condition. In December of that year, four individuals, with the consent of the Wisconsin Insurance Department, formed Market Mens Management Agency (Management) in order to refinance and manage Mutual. Management was formed by appellant Gilboy and three other Milwaukeeans: Lamonte Fonteine, a senior partner of Fonteine, McCurdy and Co., Milwaukee's largest independent certified public accounting firm; Phillip Fox, an attorney; and Milton Polland, a principal in several insurance companies. These men, through Management, purchased $300,000 of Mutual's surplus notes.

With the approval of the boards of both companies, Gilboy became the president of both Mutual and Management. Management's income was to be a stipulated fee of 38 per cent, later 39 per cent, of earned gross premiums of Mutual. The execution of the management contract was part of a plan for the rehabilitation of Mutual and it provided that Management was to be responsible for conducting the business of Mutual and providing all necessary facilities and personnel. Excepted from Management's obligations were the payments of claims losses, adjustment expenses, interest on loans and taxes.

Two years later, in October 1960, 100 per cent of Management's stock was sold to Merchant's Management Corporation (Merchants), an Illinois corporation. This sale was consummated with full disclosure to the Wisconsin Insurance Commission. Defendant Brandom controlled Merchants and initiated the purchase. Gilboy, while indicating a willingness to sell, agreed to do so only upon condition that he would be permitted to retain his positions with Mutual and Management. Subsequent to the sale to Merchants, appellant Gilboy remained as president of both Mutual and Management until his resignation on December 31, 1961. Also, in October 1960, appellant Belling was brought in by Brandom to assist Gilboy.

At the time of the October sale, the attorney for Merchants raised questions as to Mutual's financial picture with Brandom. The chief accountant for Mutual and Management indicated to Gilboy, prior to the sale to Merchants, that Mutual's records suggested that the loss reserves were inadequate. On December 14, 1960, shortly after Merchants acquired Management, Gilboy, at the suggestion of counsel, wrote to the Wisconsin Commissioner of Insurance requesting permission to increase Mutual's surplus through sale of an additional $500,000 of Mutual's surplus notes to Management. That permission was denied.⁴

In February 1961, Mutual filed with the Department of Insurance, as required by Wisconsin law, an annual statement reflecting its financial condition as of December 31, 1960. In September of 1961, prior to the filing of the annual statement, a regularly scheduled zone examination of Mutual was initiated by the insurance departments of Wisconsin, Minnesota and Missouri. This examination revealed that Mutual's surplus as of September 30, 1961, was $58,448, whereas the required surplus fund for Mutual, as determined by the examiner, was $450,000. Although the officers of Management and Mutual did not agree with the opinions of the zone examiners, certain steps were then initiated by the officers, including appellants' herein, to correct the alleged deficiency. These steps form part of the substantive basis for the indictment and convictions of defendants under 18 U.S.C. § 1341.

Before filing the 1960 annual report, Gilboy was advised by an independent firm that an overall excess loss reserve of about $232,000 existed as of December 27, 1960. This recommendation was in part made by the same firm, retained by Brandom, which had, prior to the October sale to Merchants, indicated concern over the adequacy of the loss reserves.

The 1960 annual statement of Mutual included among its assets real property at 3134-38 Broadway, Kansas City, Missouri, carried at $150,000. The property had been purchased by Mutual in December of 1960, after the zone examination, for $109,000. Testimony at the trial indicated conflicting opinions as to the true value of the property. One appraisal made in 1960 appraised the property upwards of $150,000. This 1960 appraisal was submitted to the controller of the company. Ralph Johnson, who, without consulting Gilboy, used the $150,000 figure in arriving at the fair market value and placed that fair market value, $150,000, in the admitted assets column of the 1960 Annual Statement. At the time the report was filed it was proper, as a matter of law for a Wisconsin insurance company, to place property in its Annual Statement at its fair market value.⁵

A later appraisal on August 13, 1962, valued the property around $66,000. Ultimately, upon liquidation of the property in 1962, it was sold for $61,000.

That 1960 statement also listed as assets certain Wilson Auto Leasing Co. debentures at $100,000. These debentures were acquired by Mutual in December 1960, in a transaction by which Mutual sold furniture and fixtures to Wilson in exchange for the debentures. The indictment charges in Count I that the defendant * * * "included in said statement as assets certain corporate debentures of Wilson Auto Leasing Company of Chicago, at a value of $100,000, said defendants well knowing the debentures were not admissible assets under the laws of the State of Wisconsin." This allegation stems from the zone examination of September 30, 1961 in which the examiners concluded that the Wilson Auto Leasing debentures were not admissible assets under the laws of Wisconsin.⁶ Under Wisconsin law, fixtures and furniture may not be included on a balance sheet as an admitted asset. However, debentures may be so listed. With respect to this transaction, the government contended that the conversion to debentures constituted a subterfuge and a fraud as to the mutual policy holders because it improperly increased the admitted asset value of Mutual on its 1960 statement.

On November 1, 1961, the Wisconsin Insurance Department circulated a letter among some thirteen states. The import of this letter was that the financial condition of Mutual was impaired. This communique caused the other states in which Mutual was licensed to do business to issue cease and desist orders against Mutual requiring its agents to refrain from writing business and forwarding premiums. In December of 1961, the directors of Mutual, through counsel, the state Attorney General and the Wisconsin Insurance Commissioner agreed that Mutual could improve its position through reinsurance.

In late 1961, Belling and Gilboy were advised by the Wisconsin Insurance Department of certain preliminary findings which indicated that an impaired surplus existed on or about November 1, 1961. As a result of these findings, a meeting was held between Brandom, Belling, and the Wisconsin Insurance Department to consider the financial condition of Mutual and Management. This meeting was held on January 24, 1962. Its purpose was to obtain approval of various reinsurance contracts and to gain approval of additional steps to be taken by the directors of the Mutual.⁷ These actions were approved, albeit prematurely, on January 24, 1962, and the reinsurance treaties were approved on the same date in a letter sent out by the Commissioner of Insurance to the various states. This letter indicated that Mutual's financial condition had been approved. Also at the January 24 meeting, both Gilboy's departure and the filing of the annual report for 1961 were noticed to the Commission. The 1961 annual report contained substantially all of the items which had been approved by the Wisconsin Insurance Department. The report indicated that Management owed Mutual $55,000.

Appellant Brandom became the Assistant Vice President of Management in November of 1961. He was neither a capable nor experienced insurance man and, as a result of Gilboy's departure on December 31, the company lacked experienced management. Once into 1962, the new management was unable to raise the premium income to its previous level and, consequently, Mutual never recovered its prior position even though the steps approved by the Insurance Commissioner had been taken. In March of 1962, new buyers...