U.S. v. Diamond

• Decision Date: 20 July 1992
• Docket Number: No. 91-5143,91-5143
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. James L. DIAMOND, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 961

969 F.2d 961

UNITED STATES of America, Plaintiff-Appellee, v. James L. DIAMOND, Defendant-Appellant.

No. 91-5143.

United States Court of Appeals, Tenth Circuit.

July 20, 1992.

Kathleen Bliss Adams (Tony M. Graham, U.S. Atty., with her on the brief), Asst. U.S. Atty., Tulsa, Okl., for plaintiff-appellee.

Donald M. Bingham of Chapel, Riggs, Abney, Neal & Turpen, Tulsa, Okl., for defendant-appellant.

Before ANDERSON and BRORBY, Circuit Judges, and CAMPOS, ^* District Judge.

BRORBY, Circuit Judge.

Defendant James L. Diamond appeals from an order of the United States District Court for the Northern District of Oklahoma directing him to pay restitution and costs totalling $807,853. The court ordered the restitution after Mr. Diamond pleaded guilty to two counts of filing false reports with intent to defraud a federal agency in violation of 18 U.S.C. §§ 1006 and 2.

Mr. Diamond claims, inter alia, the district court exceeded its jurisdiction under 18 U.S.C. § 3663 by directing him to pay restitution for losses caused by conduct other than the specific offense for which he stood convicted. We reverse and remand for further proceedings.

BACKGROUND

Since the late 1960's, Mr. Diamond owned and operated 100 percent of the Bartlesville Investment Corporation (BIC), a small business investment corporation licensed by the Small Business Association (SBA) to extend high risk loans to small-business entrepreneurs unable to obtain financing from other sources. As a "lender of last resort," the license permitted BIC to borrow up to three times its capital from the SBA.

Over the years, Mr. Diamond made personal capital investments in BIC totaling $645,000. As evidenced by two debentures issued in the 1970's, the SBA loaned BIC $1,710,000, exclusive of interest. BIC's obligation to repay Mr. Diamond's outstanding loans remained subordinate to BIC's obligation to repay the SBA debentures.

BIC's license to operate as an SBA investment corporation was subject to certain conditions. For instance, the SBA could call all monies advanced to BIC immediately, the SBA would review its outstanding debentures annually, and the government required Mr. Diamond to file annual reports with the SBA listing the amount and type of BIC's capital assets. Pursuant to 13 C.F.R. § 107.203, the SBA could dispose of the debentures or other securities held in connection with "the [l]everage" as it deemed reasonable.

In 1975, BIC purchased 500,000 shares of stock in Universal Energy Corporation (UEC) at twenty-five cents per share, for a total investment of $125,000. ¹ Over the next five years, BIC sold some of these shares, reducing its ownership of UEC stock to 334,000 shares by 1980. During a period from June 1980 through June 1982, Mr. Diamond removed 295,800 shares of UEC stock from BIC's capital holdings and loaned 121,000 of those shares to Mr. Robert Alexander, president and a fellow director of UEC. ² The reduction in stock represented 95 percent of BIC's total assets upon which the three-to-one ratio was calculated for the purpose of leverage. In its annual capitalization reports for 1981 through 1984, however, Mr. Diamond stated BIC held 334,000 shares of UEC stock. In reliance on the capitalization reports, SBA continued to extend the two debentures.

In July 1984, representatives of the Inspector General conducted an on-site audit of BIC's financial records at BIC's corporate Using his personal funds, Mr. Diamond replaced 295,800 shares of restricted, nontransferable UEC stock in July 1984, all of which was issued in BIC's name. However, the replacement stock was subject to three-year resale restrictions pursuant to Securities and Exchange Commission Rule 144. ³ Therefore, the stock was not fungible or equivalent to the stock Mr. Diamond previously removed. In August 1984, the SBA demanded payment of both debentures, still valued at slightly more than $1.7 million. With the debentures not secured to the extent reported in BIC's annual filing, BIC was "terribly undercapitalized" and unable to satisfy the debt.

                office in Bartlesville, Oklahoma.   Inspectors asked Mr. Diamond to produce the stock certificates showing BIC's ownership of 334,000 shares of UEC stock reflected in BIC's corporate ledger.   Despite some initial hedging, Mr. Diamond admitted BIC possessed certificates for only 38,200 shares of UEC stock.   Mr. Diamond confessed he authorized sales of the missing 295,800 shares and loaned 121,000 shares to Mr. Alexander.   The inspectors advised Mr. Diamond to restore the missing UEC shares
                

A federal grand jury brought an eleven-count indictment against Mr. Diamond, alleging charges of fraud, mail fraud, conspiracy, embezzlement and filing false reports. In a plea agreement, the government later dismissed all but two counts which alleged Mr. Diamond filed false financial reports with the SBA in June 1983 and July 1984, grossly understating BIC's capital assets in violation of 18 U.S.C. §§ 1006 and 2. ⁴ After Mr. Diamond's guilty plea, the district court suspended imposition of sentence and placed him on probation for two concurrent four and one-half year terms. The district court also directed Mr. Diamond to make restitution, pursuant to the terms of a subsequent order issued June 5, 1987. In the order, drawn, agreed to and signed by both parties, the district court directed Mr. Diamond to pay the SBA restitution for any deficiency incurred by BIC in its repayment of leverage funds, plus accrued interest and expenses.

In response to a suit filed by the SBA on June 12, 1986, the district court appointed a receiver to liquidate BIC. The receiver disposed of BIC's viable assets and recouped $796,434 as of July 31, 1991. Several factors contributed to the remaining $1 million deficiency. For example, Mr. Diamond's replacement stock was not fully transferable until July 23, 1987. ⁵ Although the receiver exercised "utmost diligence" in attempting to sell the replacement stock from July 1986 to July 1987, all efforts proved unsuccessful because UEC failed to cooperate with the receiver by refusing to direct the transfer agent to reissue those shares without restriction. Meanwhile, the low bid price of the replacement shares fell from $4 7/8 per share on July 23, 1986, to On January 29, 1991, the district court filed its findings of fact and conclusions of law, ordering Mr. Diamond to pay "restitution for the amount of loss sustained 'as a result of the offense.' " The court also reduced to a "judgment" against Mr. Diamond the deficiency of $1.2 million, less any funds obtained from the sale of BIC assets. Mr. Diamond appealed the restitution order, and the government cross appealed.

                $1 5/16 per share when the stock became fully transferable.   The 38,200 shares of UEC stock owned and properly maintained by BIC were fully marketable on June 12, 1986.   However, UEC's continued lack of cooperation prevented sale of the stock until July 16, 1987, for $1.75 per share.   Mr. Diamond also testified, and the district court found, much of the loss resulted from bad loans BIC made pursuant to SBA guidelines.   In addition, the receivership incurred a minimum of $214,287 in liquidation expenses from June 12, 1986, to March 31, 1991
                

The government filed a motion to revoke Mr. Diamond's probation on April 11, 1991, for an alleged probation violation. Mr. Diamond confessed the government's motion for revocation and the district court granted the motion in an Order filed May 21, 1991. The court vacated Mr. Diamond's probation and scheduled resentencing for August 14, 1991. The court also vacated its June 1987 restitution order, as well as all findings of fact and conclusions of law issued January 29, 1991. ⁶ According to an agreement incorporated by reference into the May 21 order, both parties agreed to dismiss their pending appeals, and the government agreed to recommend against incarceration at resentencing provided Mr. Diamond had paid the receiver $320,000.

At the resentencing hearing, the parties submitted their stipulated facts and the government fixed the SBA's loss at $807,853. ⁷ Without further hearings on Mr. Diamond's financial resources, the court entered its final restitution order on September 5, 1991. The court found "that in reliance upon [Mr. Diamond's] false reports, the SBA did not call the debentures when the capital value of BIC diminished. As a result of the false reports, [the] SBA sustained loss." After adopting by reference its previously vacated order of restitution dated June 5, 1987, and its findings of fact and conclusions of law filed January 29, 1991, the district court directed Mr. Diamond to pay the net remaining loss to the SBA, including costs, totalling $807,853. This appeal followed.

DISCUSSION

Under the Victim and Witness Protection Act of 1982 (VWPA), "[t]he court, when sentencing a defendant convicted of an offense under [title 18] ... may order, in addition to ... any other penalty authorized by law, that the defendant make restitution to any victim of such offense." 18 U.S.C. § 3663(a)(1) (Supp.1990). ⁸ Restitution functions as part of the sentencing process. United States v. Wainwright, 938 F.2d 1096, 1098 (10th Cir.1991).

Before ordering restitution, the district court "shall consider the amount of the loss sustained by any victim as a result of the offense, the financial resources of the defendant, the financial needs and earning ability of the defendant and the defendant's dependents, and such other factors Appellate review of whether a district court improperly imposed a restitution order is bifurcated. While we review the legality of the sentence de novo, we examine the amount of restitution only for abuse of discretion. United States v. Teehee, 893 F.2d 271, 273-74 (10th Cir.1990); see also United States v. Rogat, 924 F.2d 983, 985 (10th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 1637, 113 L.Ed.2d 732 (1991); 18 U.S.C. § 3742(e) (1988). Moreover, we must accept the...