U.S. v. Cosentino

• Decision Date: 22 March 1989
• Docket Number: Nos. 86-3090,86-3098,s. 86-3090
• Citation: 869 F.2d 301
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Joseph R. COSENTINO, Sr. and Robert H. Patterson, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 301

869 F.2d 301

UNITED STATES of America, Plaintiff-Appellee, v. Joseph R. COSENTINO, Sr. and Robert H. Patterson Defendants-Appellants.

Nos. 86-3090, 86-3098.

United States Court of Appeals Seventh Circuit.

Argued Oct. 28, 1988.

Decided Feb. 8, 1989.

Rehearing and Rehearing En Banc Denied March 22, 1989.

Mitchell H. Caplan, Jerome Rotenberg, Rosenfeld, Rotenberg, Schwartzman, Hafron & Shapiro, Chicago, Ill., for defendants-appellants.

Matthew R. Bettenhausen, Asst. U.S. Atty., Anton Valukas, U.S. Atty., Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and CUMMINGS and CUDAHY, Circuit Judges.

CUDAHY, Circuit Judge.

We visit once more the issue of "intangible rights" raised by mail fraud cases in the wake of the Supreme Court's decision in McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987). After a number of years during which the government successfully prosecuted defendants under the mail fraud statute for depriving people of "intangible rights," the Supreme Court ruled in McNally that a deprivation of intangible rights alone could not support a conviction for mail fraud under 18 U.S.C. section 1341. Id. 107 S.Ct. at 2881 ("We read Sec. 1341 as limited in scope to the protection of property rights."). As a result, defendants like those in the case before us who were convicted under the intangible rights theory now seek to have their convictions vacated.

The defendants in this case, Cosentino and Patterson, were originally convicted in a bench trial before Judge Aspen. While their case was on appeal, this court ordered it remanded for other reasons and then extended the order of remand to include reconsideration in light of McNally. On remand, Judge Aspen made supplemental findings of fact, and ruled that the scheme in this case involved a property right sufficient to sustain the convictions under McNally, 690 F.Supp. 647. Defendants appeal. We affirm.

I.

A.

In reviewing the facts, we take all evidence and inferences in the light most favorable to the government's case. United States v. Goudy, 792 F.2d 664, 674 (7th Cir.1986). The case centers on the Kenilworth Insurance Company ("Kenilworth"), an insurance company that originally dealt in substandard automobile insurance. This specialty did not generate great profits for the company, and by 1981 the company was so thinly capitalized that it was required by the Illinois Department of Insurance (the "Department") to submit special quarterly reports on its financial condition.

The president and majority owner of the company, Chester Mitchell, made a number of efforts to save his company, expanding beyond substandard auto insurance over the protests of Kenilworth's minority owner Milt Law. The first of these efforts took Kenilworth into the business of bond guarantees in 1981 with the help of defendant Cosentino, who met Mitchell after hearing through a mutual friend that Kenilworth might be interested in expanding into new lines of insurance. Through Cosentino, Mitchell also met defendant Patterson, who with his wife owned an insurance brokerage firm named Robco Worldwide Facilities, Inc. ("Robco"). In 1981 Mitchell entered into an agreement with Patterson that Robco would now place property and casualty insurance business with Kenilworth.

Patterson subsequently introduced Mitchell and Cosentino to Alan Assael and Jack Goepfert, who also had backgrounds in the insurance business. Assael, whom Patterson had originally known under another name, was at that time under indictment in the Southern District of New York for conspiracy and mail fraud-charges to which he subsequently pleaded guilty. By 1981 Goepfert had been convicted on felony charges in the U.S. District Court in the Eastern District of Pennsylvania, and subsequently pleaded guilty to charges filed against him in the Southern District of New York. ¹ In 1981 Assael was employed by Goepfert as an underwriter. In a meeting attended by Patterson, Goepfert and Assael at the Newark Airport in the summer of 1981, Patterson mentioned Kenilworth's interest in obtaining new business, and Goepfert represented to Patterson that he could produce $20,000,000 in business for Kenilworth.

As a result of this exchange at the Newark meeting, there ensued a series of meetings in Chicago that included Patterson, Cosentino, Assael, Goepfert and Mitchell. During the course of these meetings, Assael and Goepfert indicated that the Department of Insurance was unlikely to countenance their involvement in any planned business venture because of their past legal difficulties and discussed ways in which their involvement could be concealed from the Department. The meetings culminated in a handwritten agreement dated November 28, 1981, detailing a new business arrangement involving Cosentino, Patterson, Goepfert and Mitchell. The agreement provided that all of the parties were now to have equal ownership in and rights to profit from Kenilworth and Robco. ² Robco would serve as a managing general agency through which all of Kenilworth's business would be handled. The parties were also to receive annual salaries of $200,000, with some additional payments to Mitchell in view of the fact that he "had put a great many years of his life into [Kenilworth]." Record at 54. All four men provided that their ownership interests were to be listed in the names of their wives or children, to obscure their involvement in the arrangement. Although the Illinois Insurance Code requires that the Illinois Department of Insurance be notified of changes in ownership and control of insurance companies, Ill.Rev.Stat. ch. 73, paragraphs 743.1, 743.4, 753, 753.1 (1981), none of the parties to this agreement filed it with the Department.

In January of 1982 Goepfert drew up a managing general agency agreement governing the relationship between Robco and Kenilworth, a contract which once again was not filed with the Department. Using Robco as a managing general agency permitted the parties more latitude, because the Illinois Department of Insurance did not monitor the funds flowing to agencies like Robco as closely as it did funds going to insurance companies like Kenilworth. (In any case, Kenilworth, as noted above, was at the time under particularly close scrutiny because of its marginal financial condition.) Robco held Kenilworth's funds in a "premium trust account," from which it could withdraw money for commissions. Under the January agreement, Robco was entitled to a 30% commission, an amount which an official from the Department testifying at the trial characterized as "excessive." Record at 263. Robco actually withdrew approximately 90% of the funds in the trust account, thereby exceeding the already generous commission fee to which it was entitled. United States v. Patterson, 690 F.Supp. 647, 650 (N.D. Ill.1988). Patterson subsequently disbursed the money he obtained from the premium trust account to Mitchell's son, Cosentino's wife, Goepfert's wife and Assael's wife. He also used the money to pay office expenses. He himself did not withdraw money for his salary, but he told the bookkeeper to credit him $2,000 per week in salary. He later admitted that he would probably have eventually attempted to collect that money. The small percentage of the trust account funds that was remitted to Kenilworth evidently went to pay that company's expenses.

The managing general agency agreement with Robco not only permitted increased flexibility in withdrawing funds that properly belonged to Kenilworth, but also allowed Kenilworth to delay reporting its new business to the Department. Kenilworth thereby succeeded in writing much more insurance than was justified by its then-existing surplus, without alerting the Department to its increasingly insolvent condition. Eventually, despite efforts to reinsure these new policies through a British insurance agency, Kenilworth could no longer avoid the inevitable showing of insufficient surplus, and the Department closed it down in April of 1982.

B.

Cosentino and Patterson were indicted and convicted on eight counts of mail fraud. The indictment charged them and their co-defendants with scheming to defraud Kenilworth, its policyholders and claimants, the Illinois Insurance Guarantee Fund and its member companies, the Illinois Department of Insurance and the State of Illinois of their right to have Kenilworth's business conducted honestly. The indictment further charged them with participating in a scheme "[t]o obtain money by means of false and fraudulent pretenses and representations," and went on to describe the way in which the defendants planned to "utilize and operate Kenilworth for the purpose of obtaining money by improperly converting to their use Kenilworth insurance and bond premiums." Appendix of Appellant Cosentino at 13. The rest of the indictment contained further references to specific financial transactions in which Kenilworth's funds were used improperly. The indictment also noted the steps taken by the defendants to conceal their actions from the Illinois Department of Insurance.

Both men were convicted following a bench trial before Judge Aspen. During closing argument, Patterson's counsel attempted to address the part of the indictment that charged Patterson with scheming to obtain money by means of false and fraudulent pretenses and representations:

DEFENSE COUNSEL: Then we go to the last one, which was to obtain money by means of false and fraudulent pretenses and representations. And this record is silent as to any misrepresentations or fraudulent pretenses or representations.

And as far as the obtaining of money is concerned here, where did that money come from? It came from policyholders and-

THE COURT: I don't think the government has even argued that particular fraud, so-

DEFENSE COUNSEL: They are conceding that it wasn't there.

THE COURT: So I think for the purposes of this argument, you do not have to go through that.

DEF...