State v. Warner, s. 89-584

CourtUnited States State Supreme Court of Ohio
Citation55 Ohio St.3d 31,564 N.E.2d 18
Docket Number90-84,Nos. 89-584,s. 89-584
PartiesThe STATE of Ohio, Appellant and Cross-Appellee, v. WARNER, Appellee and Cross-Appellant.
Decision Date26 October 1990

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55 Ohio St.3d 31
564 N.E.2d 18
The STATE of Ohio, Appellant and Cross-Appellee,
WARNER, Appellee and Cross-Appellant.
Nos. 89-584, 90-84.
Supreme Court of Ohio.
Submitted June 6, 1990.
Decided Oct. 26, 1990.
Syllabus by the Court

1. The commissioning of a special prosecutor is a constitutional exercise of legislative power when the General Assembly has conferred the powers of appointment, removal and supervision on the state Attorney General.

2. R.C. 1707.44(B)(4) and (J) prohibit only affirmative misrepresentation; they do not apply to fraudulent nondisclosure.

3. R.C. 1707.44(G) prohibits not only affirmative misrepresentation, but also fraudulent nondisclosure where there is a duty to disclose. However, a defendant is not entitled to a jury instruction on nondisclosure and duty to disclose unless the state's case is premised on nondisclosure.

4. Under R.C. 1707.44(B)(4), (G), and (J), a person is criminally liable if he represents facts to be different than he should have known them to be if he had exercised reasonable diligence to ascertain the facts prior to the commission of the offense. (State v. Walsh [1979], 66 Ohio App.2d 85, 95-96, 20 O.O.3d 178, 184-185, 420 N.E.2d 1013, 1020, applied and followed; R.C. 1707.29, construed.)

5. The transfer of funds through the Fedwire system qualifies as a "draft" or other "written instrument" as those terms are used in R.C. 1153.01.

6. A court may order a defendant to pay restitution for financial damages pursuant to R.C. 2929.11.

7. The commission of unauthorized acts in violation of R.C. 1153.01 is a "theft offense" within the meaning of R.C. 2913.01(K)(3).

8. Any violation of R.C. 1707.44(B)(4), 1707.44(G) or 1707.44(J) is a "theft offense" within the meaning of R.C. 2913.01(K)(3).

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On December 13, 1985, defendant-appellant, Marvin L. Warner, and two former Home State Savings Bank ("Home State") presidents, David J. Schiebel and Burton M. Bongard, were indicted and charged with numerous felonies arising from Home State's dealings with ESM Government Securities, Inc. ("ESM"). The amended indictment charged Warner with forty-two [564 N.E.2d 22] counts of misapplication of funds and forty-one counts of unauthorized acts in violation of R.C. 1153.01. Further, Warner was indicted on four counts of securities fraud in violation of R.C. 1707.44(B)(4), 1707.44(G), 1707.44(D), 1707.44(F) and former 1708.05 (as now codified in R.C. 1707.44[J] ). Of the eighty-eight counts in the amended indictment, counts eighty-four and eighty-eight were dismissed by the trial court. On March 2, 1987, Warner was convicted on six counts of unauthorized acts and three counts of securities fraud, which included violations of R.C. 1707.44(B)(4), 1707.44(G) and 1707.44(J). On March 30, 1987, Warner was sentenced to ten and one-half years of incarceration, seven of which were suspended, and ordered to pay restitution in the amount of $22,000,000 and costs of $250,000. 1 The pertinent facts to this appeal are set forth below.

Home State was a state-chartered, privately insured savings and loan association headquartered in Cincinnati, Ohio. Home State was regulated by the Ohio Division of Savings and Loan Associations ("ODSLA") and the Ohio Deposit Guarantee Fund ("ODGF"), a private insurance fund to which Home State belonged. The ODSLA and the ODGF cooperated in regulating member institutions such as Home State.

The controlling shareholder of Home State was Warner. Warner also was responsible for selecting both Bongard and Schiebel to serve as Home State's presidents. Moreover, it seems Warner selected Home State's board of directors.

Home State's collapse began in the spring of 1977, when Warner met Ronnie Ewton, the chairman of the board of ESM. ESM, of Fort Lauderdale, Florida, was principally involved in trading governmental securities and entering into repurchase transactions ("repos") using government securities as collateral. 2 In 1977, Home State had

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ESM serve as its primary broker in its purchases and sales of government securities and in its investments in reverse repurchase agreements.

Beginning in 1980 and continuing through February 1985, Home State entered into a series of extremely large repurchase transactions (i.e., "leveraged arbitrages") with ESM. In these transactions, Home State, rather than pledging its own portfolio securities to support a "loan," relied on ESM to finance and purchase for Home State government securities worth hundreds of millions of dollars. The [564 N.E.2d 23] government securities Home State purchased with funds borrowed from ESM were placed under ESM's exclusive custody as collateral for the duration of the leveraged arbitrage, which was typically one year.

The amount of collateral Home State pledged to ESM was exceedingly large in relation to the amount Home State borrowed from ESM. The collateralization rate, i.e., the ratio of market value of collateral pledged to the amount borrowed, for repurchase transactions should normally have been, according to industry standards, no more than one hundred five percent for treasury obligations and no more than one hundred ten percent for agency obligations. However, between 1980 and 1983, the collateralization rates for Home State's transactions were as high as two hundred thirty-eight percent. Further, between February 1980 and 1985, Home State's repo loan balance with ESM ranged from $80,000,000 to $800,000,000. Each of these transactions increased the risk of loss to Home State. The difference between the market value of the collateral Home State pledged to ESM and the amount Home State borrowed from ESM was the amount Home State would lose should ESM be unable to redeliver the securities at the end of the transaction. The amount placed at risk by the overcollateralization was the functional and financial equivalent of interest free, unsecured loans from Home State to ESM.

In addition to the leveraged arbitrage transactions, Home State was able to offset losses from its normal operations with gains derived from "day trades" 3 with ESM.

By 1982, the extent and nature of

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Home State's involvement with ESM prompted concern and criticism by ODGF and ODSLA. A 1982 report of an examination of Home State conducted by ODSLA criticized Home State's excessive overcollateralization of its repurchase agreements with ESM and questioned the association's unusual success in day-trading activity. In ODSLA's 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 * * * [Home State]." The examiner noted that national examining guidelines consider as unacceptable overcollateralization in excess of one hundred five percent of repurchase transactions involving government obligations or in excess of one hundred ten percent on repurchase transactions involving Government National Mortgage Association securities ("GNMAs" or "Ginnie Maes"). Nevertheless, the average collateralization rate of Home State's repo portfolio with ESM was 211.2 percent. The market value of all Home State securities assigned to ESM as of late June 1982 was more than twice the amount of the funds that Home State had borrowed on those securities. The ODSLA report warned:

"Consequently, * * * [Home State] is vulnerable to a potential loss of about $125 million on these securities under repo agreements, should ESM be unable for any reason to redeliver the securities upon expiration of the repo agreements. * * * [Home State's] net worth is about $12 million and ESM's net worth is less than $15 million * * *.

"Such excessive overcollateralization, as herein delineated, poses a serious risk to * * * [Home State], and must be considered an unsafe and unsound practice. * * *

" * * *

" * * * [Home State's] depositors, as a result of these repo transactions alone, would be confronted with possible losses of more than ten times the parent company's $12 million loss. Such losses would exceed 25 percent of the depositors' savings capital and almost twice the assets of the Ohio Deposit Guarantee Fund."

The report concluded that the income generated by these repo transactions did [564 N.E.2d 24] not justify the tremendous risk to Home State, its depositors and the ODGF.

The ODGF agreed with ODSLA's conclusions regarding the tremendous risk created by the ESM transactions and, beginning in 1982, issued a series of directives instructing Home State to reduce its involvement with ESM. As illustrated in a letter to Schiebel dated June 2, 1982, the ODGF wrote:

"There is no question, in our minds, that the risk involved in * * * [these transactions] far exceeds any income that can be derived from it. The potential risk exposure not only puts Home State at risk, but the Fund as well. To burden the Fund and its membership with such a risk is, in our opinion, imprudent and unfair."

Finally, in response to the 1982 state examination report, which had noted the increase in Home State's involvement with ESM, the ODGF sent another letter to Home State dated February 25, 1983, which read in pertinent part:

" * * * We are most concerned with the extreme amount of over-collateralization of the reverse repo (borrowed money) with ESM Government Securities. As of June 30, 1982, the Association has borrowed money from ESM of $83.8 million and collateral assigned aggregating a market value of $177.1 million, which is $93.3 million in excess or a voluminous

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I211.2% of the amount borrowed. As of January 31, 1983, the amount of borrowed money is still $80.5 million and the over-collateralization continues at approximately the same level. In addition, national examining guidelines consider as unacceptable all cases of over-collateralization in excess of 105% of the market values for U.S. government obligations and 110% for Ginnie Mae securities.

"This substantial over-collateralization of...

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