U.S. v. DeSantis

• Decision Date: 03 March 1998
• Docket Number: No. 96-4289,96-4289
• Parties: Fed. Sec. L. Rep. P 90,120, 48 Fed. R. Evid. Serv. 807 UNITED STATES of America, Plaintiff-Appellee, v. Albert J. DeSANTIS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 760

134 F.3d 760

Fed. Sec. L. Rep. P 90,120, 48 Fed. R. Evid. Serv. 807

UNITED STATES of America, Plaintiff-Appellee, v. Albert J. DeSANTIS, Defendant-Appellant.

No. 96-4289.

United States Court of Appeals Sixth Circuit.

Argued July 31, 1997.

Decided Jan. 20, 1998.

Rehearing Denied March 3, 1998.

Randall E. Yontz (argued and briefed), Office of the U.S. Attorney, Columbus, OH, for Plaintiff-Appellee.

Dennis C. Belli (argued and briefed), Columbus, OH, for Defendant-Appellant.

Before: NELSON and RYAN, Circuit Judges; QUIST, District Judge. ^*

RYAN, J., delivered the opinion of the court. NELSON, J. (p. 770), delivered a separate opinion concurring in the judgment and in all but Part II A, in which QUIST, D. J., joined.

RYAN, Circuit Judge.

OPINION

Defendant Albert J. DeSantis appeals from the judgment entered on a jury verdict convicting him of five counts of mail fraud, in violation of 18 U.S.C. §§ 2 and 1341; and one count of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, 18 U.S.C. § 2, and 17 C.F.R. § 240.10b-5, all arising out of allegedly fraudulent misrepresentations and omissions made in selling interests in a limited partnership, through a broker, to 28 investors. DeSantis also appeals from the sentence imposed.

The defendant complains that, as a consequence of a number of evidentiary, procedural, and instructional errors committed by the trial judge, he was denied a fair trial. We agree and therefore the judgment of conviction must be reversed.

I. BACKGROUND AND PROCEDURAL HISTORY

In 1988, defendant DeSantis owned several buildings near the campus of Ohio State University, in Columbus, Ohio, as well as the businesses housed in the buildings--primarily bars. DeSantis and an associate, Michael Hobbs, formed Campus Business Limited Partnership, or CBLP, a syndication of the bars, and they offered interests in the limited partnership to investors. These interests were sold between 1989 and 1991 by Lawrence Durbin, a certified financial planner and securities salesman. To assist Durbin in soliciting potential investors, DeSantis supplied Durbin with a Private Placement Memorandum, or PPM, describing the businesses, their principals, and the risk factors associated with the offering. Each investor was required to sign a subscription agreement acknowledging receipt of the PPM, certifying that the investor was accredited, and noting the high risk associated with CBLP and its illiquidity.

The PPM indicated that Durbin would receive a 10% commission on the sale of all CBLP shares. Evidence adduced at trial revealed, however, that Durbin received additional payments--not disclosed to investors--equal to another 10%. DeSantis maintains the extra payments were not commissions, and were not paid out of CBLP funds, and therefore did not materially affect the value of the offering. Both Durbin and Hobbs confirmed at trial that Durbin received this additional 10% from DeSantis and Hobbs personally, and not out of CBLP funds. The government acknowledges this point, but argues that the routing of the money through personal accounts does not change the fact the money originated with the investors. In support of this proposition, the government points to "production sheets" in evidence and the testimony of Durbin and Hobbs. Although the testimony and the production sheets establish that Durbin received payments equal to approximately 20% of his sales, this evidence is not inconsistent with DeSantis's contention that the source of half the funds was not the investors' money. That is, the government has not argued that it produced at trial evidence that investor funds were funneled through DeSantis's personal account and then to Durbin, or that less than 90% of the investors' money went into CBLP, or even that CBLP was so grossly overvalued that DeSantis could give away 20% and still make a profit. The only such evidence the government cites is Hobbs's account of a statement allegedly made to him by DeSantis, to the effect that the CBLP offering was not really $5 million, but rather $4 million, because Durbin would get $1 million. Hobbs did not, however, testify that he was reimbursed out of CBLP funds for his personal payments to Durbin.

Three additional misrepresentations allegedly occurred in regard to the offering. First, contrary to the information in the PPM, Durbin orally and on a written "fact sheet" represented to investors that the risk related to the offering was moderate to low. Second, he told them that the investment would be highly liquid. Third, he convinced several investors that they, the investors, were "suitable," meaning that they had sufficient assets and experience to qualify for this type of investment, when in reality they were not suitable.

The government contends that DeSantis knew Durbin was making these false representations, and that he induced Durbin to make them by providing an exorbitantly high rate of compensation. Durbin did testify that the information he provided to potential investors was given to him by DeSantis. DeSantis notes, however, that Durbin had promised his assistance in the government's case against DeSantis in exchange for the prosecution's favorable sentencing recommendation regarding Durbin's guilty plea to mail fraud in connection with this transaction. No investor testified that DeSantis himself had misled them. In fact, a letter was introduced into evidence in which Durbin assured DeSantis that Durbin's sales pitch did not deviate from the PPM. And, by signing the subscription agreement, each investor acknowledged the high risk and illiquidity of CBLP and certified that the investor was able to bear those risks.

Although the parties dispute the genesis of CBLP's eventual collapse, both agree that the ultimate cause was the loss of the bars' liquor licenses. Under Ohio law, a convicted felon may not maintain a significant interest in a business enterprise that holds a liquor license. In September 1989, DeSantis pleaded guilty to two charges of filing a false income tax return--a felony. DeSantis claims that he then ceded his interest in CBLP, as well as actual control, to Hobbs. He further maintains that Hobbs's subsequent personal activities conflicted with his management duties, and that he asked Hobbs to step down as general partner. According to DeSantis, Hobbs at first acceded, but then later wrongfully appropriated CBLP's records and reinstalled himself at the helm of the business. DeSantis contends that Hobbs misappropriated funds from the businesses and failed to pay expenses, and that the limited partners therefore permanently removed Hobbs as general partner. DeSantis testified that in retaliation for being removed as a general partner, Hobbs sabotaged the businesses by falsely representing to the Ohio Liquor Control Commission that DeSantis still controlled the clubs, and by using personal connections to local public officials to shut down the bars for purported code violations. Hobbs and the government counter that DeSantis did, in fact, continue to control the bars in violation of Ohio law, leading to CBLP's bankruptcy.

Whatever the case, investors lost substantial sums due to CBLP's collapse. DeSantis was indicted on five counts of using the mails to execute a scheme to defraud these investors, one count of fraud in connection with the purchase and sale of CBLP securities, and one count of securities fraud relating to another alleged scheme of which he was acquitted. The indictment alleged, as to CBLP, that DeSantis misrepresented the commissions on the sale of partnership interests as being 10%, when he knew they would be 20%; that he made misrepresentations regarding risk, liquidity, and investor suitability; and that he used the mails as a further part of his scheme to defraud by mailing documents to the Ohio Division of Securities.

On appeal, the defendant brings seven assignments of error. We think three of them are clearly dispositive, and we shall address them in turn.

II. SCIENTER ELEMENT OF SECURITIES AND MAIL FRAUD

Before discussing the defendant's specific assignments of error, we address, as a preliminary matter, DeSantis's primary defense that his role in selling interests in CBLP did not violate the securities or mail fraud statutes because his actions were taken in good faith.

Both statutes require a specific intent to defraud. See United States v. Frost, 125 F.3d 346, 354 (6th Cir.1997) (mail fraud); Ohio Drill & Tool Co. v. Johnson, 625 F.2d 738, 740 (6th Cir.1980) (securities fraud); see also United States v. Boyer, 694 F.2d 58, 59 (3d Cir.1982) (mail and securities fraud). This means not only that a defendant must knowingly make a material misrepresentation or knowingly omit a material fact, but also that the misrepresentation or omission must have the purpose of inducing the victim of the fraud to part with property or undertake some action that he would not otherwise do absent the misrepresentation or omission. See Frost, 125 F.3d at 354. "[A] scheme to defraud must involve [i]ntentional fraud, consisting in deception intentionally practiced to induce another to part with property or to surrender some legal right, and which accomplishes the end designed." Id. (internal quotation marks and citations omitted).

Alternatively, the prosecution may prove that the defendant was reckless--that he made "an extreme departure from the standards of ordinary care[ ] [by omitting information] which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir.1977) (internal quotation marks and citation omitted); see Auslender v. Energy Management Corp., 832 F.2d 354, 356-57 (6th Cir.1987). In either case, the belief, even if bona fide, that no investor will suffer a loss from a knowing or reckless material misstatement or omission is not a defense to...