U.S. v. Herzberg

• Decision Date: 12 September 1977
• Docket Number: No. 76-3657,76-3657
• Citation: 558 F.2d 1219
• Parties: 2 Fed. R. Evid. Serv. 454 UNITED STATES of America, Plaintiff-Appellee, v. Arthur L. HERZBERG and Gerald M. Barnes, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1219

558 F.2d 1219

2 Fed. R. Evid. Serv. 454

UNITED STATES of America, Plaintiff-Appellee, v. Arthur L. HERZBERG and Gerald M. Barnes, Defendants-Appellants.

No. 76-3657.

United States Court of Appeals Fifth Circuit.

Sept. 12, 1977.

Joseph A. Calamia (Court-Appointed), Charles M. Mallin, El Paso, Tex., for defendants-appellants.

John E. Clark, U. S. Atty., LeRoy M. Jahn, Jeremiah Handy, Asst. U. S. Attys., San Antonio, Tex., Frank B. Walker, Asst. U. S. Atty., El Paso, Tex., for plaintiff-appellee.

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

Before THORNBERRY, AINSWORTH and RONEY, Circuit Judges.

THORNBERRY, Circuit Judge:

Gerald Barnes and Arthur Herzberg appeal their convictions for devising a scheme and artifice to defraud, using the mails, in violation of 18 U.S.C. § 1341. They bring two errors for review: first, that the trial court erred in permitting the government to cross-examine Barnes on the subject of a prior, unrelated civil fraud judgment taken against both Barnes and Herzberg; and, secondly, that the trial court erred in allowing adverse testimony as to Barnes' reputation for truthfulness in the community. Finding no reversible error, we affirm the judgments of convictions.

I.

The evidence adduced at trial, viewed in the light most favorable to the government, ¹ painted the following picture.

On September 13, 1972, Barnes purchased 50% of the stock of Bankers Trust Company of Albuquerque, New Mexico (Bankers Trust) in his own name and that of one of his employees, from the sole owner and founder of Bankers Trust, Sterling Wayne Pirtle. At the time of the sale, Bankers Trust owned no assets. Ten days later, however, Bankers Trust issued a financial statement listing assets in excess of $7,000,000. That financial statement falsely listed assets not belonging to the corporation, and ballooned the values of certain real estate. In fact, Pirtle, who retained a 50% interest in the corporation until December 1972, stated at trial that no assets were placed in Bankers Trust at the time that this financial statement was issued.

Four months later, Barnes acquired the remaining interest in Bankers Trust from Pirtle. Five days later, on January 5, 1973, Bankers Trust issued a second financial statement, this time certified by a Certified Public Accountant. On this second financial statement, Bankers Trust assets were listed in excess of $18,000,000. The January 5, 1973, financial statement was prepared in the office of a Certified Public Accountant, who certified as to its content based on information submitted by Barnes and the corporate attorney. At the time, there was no cash on hand, although the statement reflects a cash balance of $598,000; there was no million dollar letter of credit from Germany; some of the stock listed as an asset was not owned by the corporation; the corporation did not have complete ownership of the buildings and plants listed in the financial statement; and the real estate reflected as owned by the company was never actually owned by it. Both financial statements formed an integral part in the sales presentation made by Bankers Trust salesmen, who displayed them to potential investors.

In addition, the listing of the Board of Directors contained in those statements was equally false. Each of the shareholders who testified, with one exception, stated that he became aware of his position on the Board only after the listing was printed. One of the individuals listed as a Director had never been introduced to Barnes or Herzberg. All of the members of the Board of Directors who testified at trial stated that they never attended meetings and did not know of any meetings having ever been held; in short, they performed no function for Bankers Trust. The company was run by Barnes and Herzberg.

Barnes acquired Bankers Trust as a tool to raise funds from investors to invest in other projects and to take advantage of New Mexico's lenient regulation of trust companies. To this end, Barnes and Herzberg acquired or created a series of corporations, companies and ventures; among them were the Bay of St. George, a venture to acquire and develop resort land in Mexico; Diversified or Development Management Limited, a company operating an air service, a flight school, and a market for buying and selling airplanes; Molecular Industries, a company developing a door balancer and molecular engine; A&A Sand and Gravel Company; and Maricopa Ventures, a corporation to own and develop real property in Arizona. Most of these corporations and ventures were listed as assets of Bankers Trust, even though most of them were never acquired or failed for lack of funds.

The investors were solicited from the general public in New Mexico, Arizona and El Paso, Texas, and their investments ranged from $2,000 to over $100,000. Both the Bankers Trust salesmen and the investors testified that in addition to the falsified financial statements, the following misrepresentations were made: that the investors would receive a guaranteed return on their investment of 12% to be paid monthly, quarterly, or yearly; that the investment was a good one and was safe and prudent; and that the investor could obtain the return of all invested funds upon giving the company a certain period of written notice. In addition to the misrepresentations both in writing and in sales presentations, some of the investors were taken on company-paid trips to view the investments and assets which the company ostensibly owned.

Both Barnes and Herzberg testified in their own behalf denying all the allegations contained in the indictment and much of the evidence presented against them. Basically, the defense consisted of their declarations of their good faith in the organization and operation of Bankers Trust and their assertions that they had relied on the advice of counsel in all that they did.

The two errors of which Barnes and Herzberg complain center not on any of the information going directly to establish the alleged offenses. Rather, the first pertains to a particular line of the government's cross-examination of Barnes, and the second focuses on certain rebuttal testimony concerning Barnes' reputation in Phoenix for truthfulness.

On cross-examination, the prosecutor asked Barnes if he knew a Ruth Vosack during the period when he held a securities license. Barnes replied that he knew Mrs. Vosack, but had not known her when he had his license. Elaborating on the relationship, Barnes stated that he had had some dealings with Mrs. Vosack through Commercial Management Corporation, a corporation owned and run by Barnes and Herzberg but not involved in the present case. Barnes briefly described the nature of the business relationship, a limited partnership for the financing of insurance premiums, and stated simply that the state had declared the contract to be a security and therefore the parties cancelled it. In response to the prosecutor's question, Barnes denied that any litigation had arisen from the relationship. Then, the prosecutor handed Barnes a document, which was an opinion of the Arizona Supreme Court in a case where Ruth Vosack opposed Barnes, Herzberg, their wives, and a Mr. Tatsch. Further questioning elicited Barnes' statement that he knew very little about the case, but that it had nothing to do with the limited partnership. The prosecutor suggested that the suit was a fraud lawsuit brought by Ruth Vosack against Barnes and Herzberg, which Barnes denied, though hesitantly. It was a suit which Barnes and Herzberg had lost. Then the prosecutor asked Barnes to read aloud the last sentence of the opinion, which revealed that the Arizona Supreme Court affirmed the judgment of fraud.

As might be expected, this line of questioning elicited sharp objection from Barnes' counsel, and a motion for a mistrial. He complained that the government attorney's action amounted to impermissible impeachment of the witness as to a collateral matter. The government countered that it sought to introduce the judgment to impeach Barnes in his denial of the existence of litigation and his denial of the nature of the litigation. The line of questioning, claimed the government, was opened by the defense when defense counsel inquired on direct examination of another witness about the existence and some of the operations of Commercial Management Corporation. As additional justification for admitting the evidence the government claimed that it is relevant to proving Barnes' motive and intent. The trial court ruled that the questioning was proper and that the evidence of the prior judgment was admissible only on the ground of impeaching Barnes as to matters which he answered falsely or incorrectly. Proof of motive or intent failed to support this action, said the judge, because the battle occurred during cross-examination of a defendant. The trial court issued no limiting instruction on this evidence.

In its rebuttal presentation, the government sought to introduce testimony as to Barnes' reputation in the community (Phoenix) for honesty and fair dealing. On the basis of F.R.Ev. 608(a), the court limited the inquiry to Barnes' reputation for truthfulness. As he asked the question, the prosecutor mentioned that his questioning had been limited by the court. The witness testified that Barnes had a bad community reputation for truthfulness. Barnes' counsel again objected and moved for a mistrial. No limiting instruction was given.

We agree with Barnes that the cross-examination was improper and the evidence was improperly admitted. Nevertheless, we stand convinced that the error was harmless. We see no error in the rebuttal testimony or in the manner of asking the question.

II.

A. Evidence of Prior Wrongs

Init...