Trust Co. of Louisiana v. N.N.P. Inc.

• Decision Date: 23 January 1997
• Docket Number: No. 95-30493,95-30493
• Citation: 104 F.3d 1478
• Parties: Fed. Sec. L. Rep. P 99,529, 36 Fed.R.Serv.3d 1261 TRUST COMPANY OF LOUISIANA, Plaintiff-Appellee, v. N.N.P. INC.; L.C.E. International Inc.; Lawrence R. Leal; William M. Moore; Reliance Capital Associates; David Lloyd; Grant Curtis; Johnson & Gibbs; Daniel M. Matheson, III; M. Sheppard Strong; Dennis A. Jamieson; James F. Crank, George Eggleston, Defendants, and Robert H. Wyshak; Robert H. Wyshak & Associates, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1478

104 F.3d 1478

Fed. Sec. L. Rep. P 99,529, 36 Fed.R.Serv.3d 1261

TRUST COMPANY OF LOUISIANA, Plaintiff-Appellee, v. N.N.P. INC.; L.C.E. International Inc.; Lawrence R. Leal;

William M. Moore; Reliance Capital Associates; David

Lloyd; Grant Curtis; Johnson & Gibbs; Daniel M. Matheson,

III; M. Sheppard Strong; Dennis A. Jamieson; James F.

Crank, George Eggleston, Defendants,

and

Robert H. Wyshak; Robert H. Wyshak & Associates,

Defendants-Appellants.

No. 95-30493.

United States Court of Appeals, Fifth Circuit.

Jan. 23, 1997.

Pauline F. Hardin, Robert B. Bieck, Jr., Laura Leigh Blackston, Jones, Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, LA, for plaintiff-appellee.

Robert H. Wyshak, Wyshak & Associates, Beverly Hills, CA, pro se.

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

Before BENAVIDES, STEWART and DENNIS, Circuit Judges.

OPINION ON PETITION FOR REHEARING

STEWART, Circuit Judge:

The petition for rehearing is denied. The opinion reported at 92 F.3d 341 (5th Cir.1996) is withdrawn, and the opinion below is substituted in all respects for the withdrawn opinion, 92 F.3d 341.

FACTS

This civil litigation grew out of a complex scheme developed in Texas by several defendants not party to this appeal. The object of the scheme was to entice institutions like the plaintiff TCL into lending money they would not otherwise have lent. The perpetrators of the scheme (hereinafter collectively referred to as "Reliance,") represented to potential investors that they controlled certain Government National Mortgage Association Certificates ("GNMAs") and intended to use the GNMAs as collateral. When a potential investor agreed to invest in one of the perpetrators' various shell corporations, the investment was structured as a loan. Those loans The Government National Mortgage Association (the "Association") guarantees privately issued securities backed by pools of FHA or VA mortgages, and these securities are commonly referred to as GNMAs. According to the testimony of William D. Hawkland, former Chancellor and Professor of Law at Louisiana State University, the Association warrants the performance of the private issue, guaranteeing that investors in GNMAs will receive monthly "pass-through" of principal and interest payments due on the pooled mortgages, even if the original mortgagors on the underlying loans do not make their payments or the lenders on the underlying loans default. Chemical Bank [now merged with Chase Manhattan] is the Association's authorized transfer agent, and issues all GNMA certificates. Approximately 96% of the certificates are issued to Participants Trust Company ("PTC") and held by Chemical Bank in its capacity as custodian for that company. The few certificates not issued to PTC are registered by Chemical Bank in the name of individual buyers and the certificates themselves are physically delivered to these buyers. The PTC certificates are locked in Chemical Bank's vault and thereafter dealt with on an uncertificated basis. PTC employs a book entry system to effect transfer of the uncertificated GNMAs, and deals directly only with certain large financial intermediaries called "Participants." The Participants themselves deal with brokers and banks who in turn deal with individual customers. Going down the chain, each dealer records the transactions in its own books. Thus, ownership of uncertificated GNMAs is established by following the chain of book entries, and a security interest in an uncertificated GNMA can only be perfected where the pledge is registered on the books of a financial intermediary in the name of the secured party. In the case of a certificated GNMA, a PD-1832 form must accompany the actual certificate in order to endorse a GNMA, thus a security interest in a certificated GNMA cannot be created unless the note establishing that interest is accompanied by the certificate and its associated PD-1832.

were evidenced by several notes, and the notes themselves were purportedly secured by a security interest in certain listed GNMAs. The notes themselves, however, were mere paper, because a security interest in a GNMA cannot be created by means of the complex scheme developed by the defendants which included the filing of a UCC-1 statement.

In the case at bar, the trial court found that none of the defendants actually held any interest in any of the GNMAs listed in TCL's two notes, and thus the loans made were not backed up by any collateral. TCL loaned $2,500,000.00, thinking that it was investing in a long distance telephone company and that the investment was backed up by certain GNMA's. TCL only discovered the fraud when N.N.P. Inc. ("NNP") and L.C.E. International Inc. ("LCE"), the shell corporations to which it had loaned the money through Reliance, defaulted on the loan. Because the money TCL had loaned to the scheme came from seven ERISA plans managed by TCL and Ruston State Bank, pursuant to federal law, TCL restored those institutions to status quo ante by paying principal, attorneys' fees, and interest.

By the time the case came to trial, many of the original 20 defendants had already settled with TCL, and some had been convicted of various wire fraud charges connected with the scheme. The remaining defendants included Reliance Capital Associates, Lloyd, Jamieson, Wyshak, Eggleston, Wyshak & Associates, and Grant Curtis. Lloyd had become a fugitive from justice and did not appear for trial. Curtis also did not appear for trial. Jamieson appeared pursuant to a writ of habeas corpus ad testificandum, having agreed to testify as a witness for TCL in exchange for dismissal as a defendant in the instant civil litigation. Wyshak and Eggleston appeared for trial pro se, though they ignored the scheduling order and their failure to comply with discovery orders led to severe sanctions.

Jamieson testified that he and another of the defendants approached Eggleston and asked if Wyshak's law firm would serve as custodian of the GNMA's for various investors in the scheme. Eggleston, a non-lawyer previously convicted of securities fraud At trial, Jamieson presented evidence from which the trial court adduced that Wyshak knew the Reliance transactions were not backed up by interest in any GNMA's, and that he and Eggleston misrepresented what they held. While it was apparently Wyshak who carefully crafted letters to imply that the assets held in custody included the GNMA's themselves, Eggleston built the law firm's "due diligence" file which made it look as if the law firm had carefully made sure that the transactions were indeed backed by GNMAs. According to Jamieson, it was Eggleston who drafted or tailored a number of the supporting documents that lent credence to the scheme. Eggleston helped in fabricating a statement of account and a comfort letter from Johnson & Associates, purportedly an accounting firm. Eggleston also told Jamieson how to create a fake account statement from the Republic National Bank in Panama for the custodial files. For his part, Wyshak also tried to demonstrate that he had performed due diligence in assuring that the securities involved existed. Wyshak asked to meet the purported owner of the GNMA's at issue. Jamieson and the other principal perpetrators of the scheme secured the services of an actress who told Wyshak that she was Rosa Kant, a Panamanian citizen who represented some leaders in Central and South America and who wanted their monies invested secretly and confidentially. No evidence was presented to indicate that Wyshak further investigated this story that the money used to purchase the GNMAs was laundered drug money from out of the country, nor was evidence presented to indicate that he ever actually asked to see the GNMA certificates allegedly owned by the fictitious Rosa Kant.

worked with Wyshak in the law firm. Reliance believed that a potential investor would be reassured and more willing to invest if he thought that he could get possession of the notes from Wyshak's law firm in the event of a default. Wyshak agreed to act as custodian in March, 1990.

Further acts established that Wyshak knew or should have known that the perpetrators did not in fact own the GNMAs in question. Wyshak and Eggleston listed some of the GNMAs as assets of Fidelity Asset Insurance, an insurance company of which they were trying to gain ownership. In connection with this endeavor, Eggleston had Jamieson pose as an officer of Fidelity Asset Management. When the Utah Insurance Commission began to investigate Fidelity Asset's books and could not trace the true ownership of the GNMAs listed as assets, the commission put the company into receivership. Jamieson testified that he received a phone call from Eggleston after an FBI agent had seized Eggleston's briefcase at Wyshak's office with Wyshak present in connection with a different transaction involving a purported and unverifiable security interest in the same GNMAs, yet Wyshak continued to participate in deals involving Reliance and the GNMAs, including the instant representation to TCL that he was holding the GNMAs on assignment for them.

The TCL transaction closed on June 26, 1990. Jamieson testified that Eggleston at least was aware of the transaction. Moreover, letters indicated that Wyshak was undoubtedly aware of the transaction as well. On June 26, 1990, Reliance sent a copy of the custodial agreement to Wyshak, requesting that Wyshak execute it and return it to TCL. Additionally, Eggleston received a letter dated June 25, 1990, from Jamieson, stating:

Concerning the transaction with LCE (Larry Leal). If you would, please have Mr. Wyshak execute two custodial agreements and return to me. There will be a call in this from Mr. Jimmy Crank of the Trust Co. of Louisiana, Trust Department of the Ruston State Bank of Ruston, Louisiana [TCL], on the Standard Verification of Assets, Etc. His main concern is the time frame of liquidation...