State v. Marvin L. Warner, 89-LW-3908

CourtUnited States Court of Appeals (Ohio)
Writing for the CourtPER CURIAM
PartiesSTATE of Ohio, Plaintiff-Appellee, v. Marvin L. WARNER, Defendant-Appellant. STATE of Ohio, Plaintiff-Appellee, v. David J. SCHIEBEL, Defendant-Appellant.
Docket NumberC-870222,89-LW-3908
Decision Date15 November 1989

STATE of Ohio, Plaintiff-Appellee,

Marvin L. WARNER, Defendant-Appellant.

STATE of Ohio, Plaintiff-Appellee,

David J. SCHIEBEL, Defendant-Appellant.

No. C-870222. Judgment reversed and cause remanded, 55 Ohio St. 3d 31 (1990).

89-LW-3908 (1st)

Court of Appeals of Ohio, First District, Hamilton

November 15, 1989

Criminal Appeals From: Court of Common Pleas.

Lawrence A. Kane, Jr., Special Prosecutor for State of Ohio, Mark A. Vander Laan, Carl J. Stich, Kenneth S. Resnick, M. Gabrielle Hils, Cincinnati, and Jerold H. Israel, Winsted Boulevard, Ann Arbor, Michigan and Anderson, Russell, Kill & Olick, P.C., and John H. Doyle, III, New York City, for plaintiff-appellee.

Miller, Cassidy, Larroca & Lewin, William H. Jeffress, Jr., R. Stan Mortenson, Seth P. Waxman, and Julia E. Guttman, Washington, D.C. and Robert R. Hastings, Jr., Cincinnati, for defendant-appellant Marvin L. Warner.

Coolidge, Wall, Womsley & Lombard Co., L.P.A., and Roger J. Makley, Dayton, for defendant-appellant David J. Schiebel.


This cause came on to be heard upon the appeals, the transcripts of the docket, journal entries and original papers from the Court of Common Pleas of Hamilton County, Ohio, the transcript of the proceedings, the briefs and the arguments of counsel.

In December 1985, a joint, multi-count indictment was returned against defendant-appellant Marvin L. Warner, defendant-appellant David J. Schiebel, and Burton M. Bongard. The indictment charged Warner, Schiebel and Bongard with willful misapplication of funds and unauthorized acts in violation of R.C. 1153.01 and with state securities law violations in contravention of R.C. 1707.44, in connection with the March 1985 collapse of Home State Savings Bank (Home State). The defendants were tried jointly to a jury, which returned verdicts of guilty against Warner on six counts of unauthorized acts and three counts of securities law violations, against Schiebel on three counts of securities law violations, and against Bongard on forty-one counts of willful misapplication of funds and forty-one counts of unauthorized acts. The trial court sentenced the defendants as appears of record and entered judgment accordingly. From the judgments entered below, Warner and Schiebel have taken the instant appeals in which each appellant advances sixteen assignments of error.®1¯

Home State was a savings and loan association, chartered by the State of Ohio, with deposits privately insured by the Ohio Deposit Guarantee Fund (ODGF). Warner was the sole shareholder of Home State and, until July 1977, served as chairman of its board of directors. Bongard served as president of Home State from 1973 and as chairman of the board from July 1977 until May of 1984, when he resigned both positions. Schiebel was a vice-president of Home State and the secretary and managing officer of the association until October 1984, when he became president and chairman of the board. Schiebel continued to serve as president and chairman of the board until March 1985, when Home State closed.

Unauthorized acts

The events that led to Home State's collapse began in the spring of 1977, when Warner met Ronnie Ewton, the president of ESM Government Securities, Inc. (ESM). ESM, based in Fort Lauderdale, Florida, was a broker-dealer specializing in transactions in United States government securities. In April 1977, Home State engaged ESM to serve as its primary broker in its purchases and sales of government securities and in its investments in reverse repurchase agreements.®2¯ Within three years, Warner and Bongard opened accounts with ESM for investments of their personal funds in repurchase agreements and day trades.®3¯

By 1982, the extent and nature of Home State's involvement with ESM prompted concern and criticism by the ODGF and the Ohio Department of Commerce, Division of Savings and Loan Associations (ODSL). The 1982 report of an examination of Home State conducted by the ODSL criticized Home State's excessive overcollateralization of its repurchase agreements with ESM ®4¯ and questioned the association's unusual success in its day-trading activity. In his report, the examiner characterized Home State's excessive overcollateralization of its repurchase agreements as "an unsafe and unsound practice" which "pose[d] a serious risk to the association." State's Ex. 3, at 24. The examiner noted that national examining guidelines consider unacceptable overcollateralization in excess of 105 percent on repurchase transactions involving government obligations and overcollateralization in excess of 110 percent on repurchase transactions involving Government National Mortgage Association securities (GNMAs).®5¯ He found that the average collateralization on Home State's repurchase agreements with ESM was 211.2 percent and projected that, if ESM defaulted in returning Home State's securities at the end of the repurchase term, Home State faced a loss of $125 million, which would far exceed the combined net worths of Home State and ESM. The examiner also noted that, in twenty-two day-trading transactions conducted through ESM from June 1981 to June 1982, Home State suffered no losses. This unusual success rate caused the examiner to question whether ESM was protecting Home State against losses in its day-trading activity to retain Home State's highly lucrative repurchase business. State's Ex. 3, at 29.

The 1982 ODSL examination report served to fuel the ODGF's concern with Home State's repurchase agreements. This concern, which was conveyed by the ODGF to Home State's officers and directors in a series of correspondence, culminated in a letter dated February 25, 1983, from the ODGF to Home State's board of directors, directing the board to formalize by resolution its intention to bring Home State's repurchase agreements in line with the national examining guidelines and to keep future borrowing within those guidelines. At its April 28, 1983, meeting, Home State's board of directors passed a resolution affirming its purpose to comply with the ODGF's February 25 letter.

In March 1983, prior to passage of the board's resolution, but following receipt of the ODGF's February 25 directive, Home State received from ESM a new repurchase proposal for the association and Warner. Schiebel, whose (either appointed or assumed) duty it was to respond to the concerns and criticisms of the ODSL and the ODGF, advised against accepting the proposal, anticipating that the regulators would find it objectionable. Nevertheless, on April 13, 1983, at a meeting with Ewton, ESM's chief investment officer Alan Novick, and Home State's vice-president in charge of investments Gerald Stephens, Warner and Bongard approved the repurchase proposal, pursuant to which Home State purchased $200 million in GNMAs and $400 million in five-year United States Treasury notes and pledged the securities to ESM under a one-year repurchase agreement. The proposal included a matching GNMA futures transaction as a hedge against the risk that, at the end of the repurchase term, an increase in market interest rates would reduce the value of the securities below cost, and the agreement provided for margin calls every thirty days to maintain the level of collateralization.®6¯ Warner invested $100 million under an identical repurchase agreement and granted Bongard power of attorney on his personal account.

On May 31, 1983, ESM made its first margin call on Home State. Margin calls continued through October 14, 1983, and Home State responded with forty-one payments to ESM for a total in excess of $114 million. Although the repurchase agreement permitted margin calls in either direction concomitant with fluctuations in market interest rates, Home State made no margin calls on ESM. With the exception of payment on the July 15, 1983, margin call, which Schiebel approved, Bongard approved Home State's payments on all margin calls through August 1983, and he conceded at trial that his approval of payments on margin calls was given with knowledge that collateralization of the repurchase agreements exceeded the national examining guidelines.

As Schiebel had predicted, the April 1983 repurchase agreement provoked strenuous objections by the regulators. In June 1983, the ODSL examiner who had prepared the 1982 examination report returned to Home State to review the status of the association's repurchase agreements. The examiner noted in his status report that collateralization of the repurchase agreements had been substantially reduced from $125 million to $55 million. He found, however, that Home State's exposure to loss was still substantial because collateralization still exceeded the association's net worth, and that the risk of loss was not reduced by the futures hedge, which merely served to protect against interest rate fluctuations. The ODGF reviewed the ODSL status report. By letter to Home State dated August 9, 1983, the ODGF noted that the report disclosed collateralization of the April 1983 repurchase agreement in excess of ODGF directives and questioned whether Home State's directors, when presented with the transaction, were made aware that the transaction violated the April 1983 board resolution.

By August 1983, Warner had also become concerned over the April 1983 repurchase agreements. On August 5, Warner, Schiebel, Bongard and Stephens met to review an in-house status report on the repurchase agreements. The report showed that Home State's repurchase agreements were overcollateralized by $32.5 million over the guidelines and that Home State had at risk $73 million. Warner also learned of the margin calls and that payments to ESM in response had resulted in unrealized losses of $20 million on Home State's repurchase agreements and $6 million on his personal account. At an investment meeting on August 29 with Schiebel, Stephens and other investment personnel, Warner withdrew Bongard's power of...

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