U.S. v. Riddle

• Decision Date: 07 January 1997
• Docket Number: No. 95-20251,95-20251
• Citation: 103 F.3d 423
• Parties: 46 Fed. R. Evid. Serv. 253 UNITED STATES of America, Plaintiff-Appellee, v. John C. RIDDLE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 423

103 F.3d 423

46 Fed. R. Evid. Serv. 253

UNITED STATES of America, Plaintiff-Appellee, v. John C. RIDDLE, Defendant-Appellant.

No. 95-20251.

United States Court of Appeals Fifth Circuit.

Jan. 7, 1997.

Rehearing Denied May 20, 1997.

Cynthia C. DeGabrielle, Paula Camille Offenhauser, Alice Ann Burns, Asst. U.S. Atty., U.S. Attorney's Office, Houston, TX, for plaintiff-appellee.

John Davidson Nation, Dallas, TX, Samuel J. Buffone, Ropes & Gray, Washington, D.C., William Edward King, Kemah, TX, for defendant-appellant.

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

Before KING and HIGGINBOTHAM, Circuit Judges, and LAKE, ^* District Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

John C. Riddle appeals his convictions for bank fraud, misapplication of bank funds, making false entries, and conspiracy. Although he argues a variety of points of error, we limit our discussion to the trial court's evidentiary rulings. We are persuaded that the cumulative and interactive effect of four rulings requires that we reverse the judgment of conviction and remand for a new trial.

I.

Riddle opened Texas National Bank-Post Oak on May 7, 1984. He was chairman of the board and co-trustee of a voting trust that controlled a majority of the shares. Because of unusually high opening day deposits totaling around $38 million, the Office of the Comptroller of the Currency ("OCC") initiated an examination of TNB-Post Oak only sixty days after the bank was launched. An OCC inspector, Gary Meier, discovered that the bank's purchases of five $800,000 loan participations violated its legal lending limit. Meier expressed to the bank his concern that it was imprudently relying on repurchase agreements without inspecting the creditworthiness of the entities that had promised to repurchase the participations if they went bad. He explained to Riddle and the bank's board that OCC regulations required banks to review loan participations as thoroughly as if the bank were initiating the loan.

In March of 1985, ten months after opening TNB-Post Oak, Riddle opened a second bank, Texas National Bank-Westheimer ("TNB-W"). The criminal charges at issue in this case arose out of Riddle's relations with this second bank. As chairman, Riddle held approximately ten percent of the bank's stock. As with TNB-Post Oak, a voting trust named Riddle as co-trustee. Riddle was not an officer, but he exercised control over various board members. The board declared that Riddle was not an executive officer. But in November of 1985, the OCC concluded that the board's declaration was ineffective because Riddle in fact controlled the bank's activities, including the activities of Victor C. Bane, the bank's president and loan officer.

The OCC inspected TNB-W in September of 1985 and found a number of problems. Its loans-to-debt ratio was an unhealthy 105 percent. The most serious problem concerned loans to insiders. On opening day, it granted a $400,000 unsecured loan to Riddle, which immediately put the bank in violation of banking regulations as well as its own policies. The next month, Riddle had Bane issue a $415,000 letter of credit to Rick Dover, Riddle's real estate development partner, to satisfy the lender behind one of Riddle's commercial real estate projects. Dover did not have to post collateral, and in exchange Riddle granted a 15 percent interest in the project to Dover. According to the OCC, the bank failed to keep proper documentation for transactions with businesses owned by bank directors. A full twenty-five percent of the bank's gross loans went to insiders or companies related to insiders. The OCC inspector discussed the loans-to-insiders violations with Riddle and the board. His report listed loans to Riddle in particular as problematic.

TNB-W lost money during its first six months. To remedy this, the board decided to pursue a strategy suggested by Bane: the bank would raise its interest rate on certificates of deposit to generate short-term assets. The strategy worked as planned, and between September 30, 1985, and December 31, 1985, TNB-W tripled its assets. To pay the interest on these certificates, the board resolved to purchase loan participations. Riddle suggested that TNB-W turn to Vernon Savings & Loan, a thrift operated primarily by Don Dixon, the chairman of Dondi Corporation, Vernon's controlling shareholder. Riddle had done personal business with Vernon and Dixon in the past. He did not disclose to the board, however, that he had a personal business interest in TNB-W's purchase of participations from Vernon.

In addition to opening banks, Riddle was involved in real estate development. In September of 1984, Riddle and Dover formed Hickory Creek Joint Venture to purchase a 1230-acre tract west of Houston called Park Green. They signed a note for $40 million. In the late spring of 1985, they bought an adjacent 230 acres with $13 million in financing. Vernon bought 35 percent of the first loan; Western Savings and Loan bought the other 65 percent. Vernon and Western also funded the second loan and took a pro rata profit participation that would take effect upon sale of the property.

By the fall of 1985, Riddle was having cash-flow problems and wanted to sell the Park Green property. Another Houston developer, John Ballis, expressed interest in buying Park Green and proposed swapping Park Green for a piece of land known as the Superior Oil tract, which was located closer to downtown Houston and thus was more desirable for development. Ballis had deposited $1 million to obtain an option to purchase the Superior Oil tract before December 23, 1985. On September 24, Riddle and Dover signed a letter of intent to purchase the Superior Oil tract from Ballis in exchange for the Park Green property.

At the end of October of 1985, Riddle sought funding for the Superior Oil deal from Vernon and Dixon. Dixon explained, however, that regulators had imposed growth restrictions on Vernon and suggested that Riddle find another lender to buy loan participations from Vernon so that Vernon could finance Riddle's project. In October and November, Dixon and Riddle took a 3-week European vacation, during which they explored ways to structure transactions so that Vernon could fund the Superior Oil deal. At a November meeting at Dixon's office, Riddle suggested that Vernon buy 30 percent of the $78 million loan that Western would issue for the Superior Oil purchase. He explained that he would have TNB-W buy $8.5 million in loan participations from Vernon. Woody Lemons, Vernon's president, expressed concern that this would violate bank regulations governing loans to insiders. But Riddle nevertheless went forward with his proposal to the TNB-W board that it buy loan participations from Vernon. Riddle brought Bane to Dixon's office to work out the details of purchasing the loan participations.

At November and December meetings, Riddle and Bane urged the TNB-W loan committee to purchase participations from Vernon. TNB-W, however, did not have time to review the quality of the loans, and Vernon did not include sufficient documentation to support TNB-W's purchase. As it turned out, Vernon's loans were delinquent: Vernon had been paying the interest itself in order to make the loans appear sound.

Dixon and other Vernon officials were aware of Riddle's scheme and acted to see that TNB-W purchased enough participations to allow Vernon to fund the Superior transaction. On December 4, TNB-W's loan committee recommended that TNB-W purchase seven participations from Vernon. In connection with the loans, Vernon issued unconditional buyback letters, which guaranteed that Vernon would pay in case the borrowers defaulted. Both Vernon and TNB-W hid these letters from regulators because, as far as the OCC was concerned, they meant that Vernon had not really reduced its loan portfolio after all. TNB-W's board approved the purchases on December 17. At the insistence of Riddle and Bane, the board also approved the purchase of an additional $6 million in participations from Vernon.

Facing the December 23 deadline, Ballis bought the Superior Oil tract for $64 million on December 17. After forming the Regents Park Limited Partnership, Riddle and Dover agreed to buy the Superior Oil tract from Ballis for $63.1 million. The closing took place on December 23, and Ballis bought the Park Green property for $64.4 million. Vernon was to fund $23 million of the $78 million loan that Riddle and Dover needed to finance the Superior Oil purchase. But on December 24, Dixon told Riddle that Vernon would not send the money until TNB-W sent the $6 million that had been due the previous week for loan participation purchases. Bane purchased an additional 21 participations from Vernon on behalf of TNB-W without approval of the TNB-W board and wired over $9 million to Vernon during the last week of December. During that same week, Vernon wired $10.9 million to Western to buy a participation in Western's loan to Riddle and Dover.

Bill Plyler, a TNB-W executive vice president, was suspicious of Riddle's behavior and asked the OCC to audit TNB-W in late December of 1985 or January of 1986. The OCC was especially worried about the high concentration of participations purchased from Vernon and TNB-W's rapid growth from $10 million to $32 million over the course of three months. Several board members confronted Riddle, who denied that his Superior loan from Vernon had been contingent on TNB-W's purchase of participations from Vernon. In part as a result of the board's discovery of Riddle's conduct, Bane resigned in January, and Plyler replaced him as president. In the aftermath of Bane's resignation, bank officials discovered that Riddle had caused TNB-W to make a number of imprudent loans for his own or his friends' benefit. Plyler insisted that Riddle write a letter to the OCC to explain TNB-W's decisions. Riddle complied, but the government ultimately...