U.S. v. Serpico

• Decision Date: 20 February 2003
• Docket Number: No. 02-1702.,No. 02-1925.,No. 02-1726.,02-1702.,02-1726.,02-1925.
• Citation: 320 F.3d 691
• Parties: UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. John SERPICO and Gilbert Cataldo, Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

320 F.3d 691

UNITED STATES of America, Plaintiff-Appellee, Cross-Appellant, v. John SERPICO and Gilbert Cataldo, Defendants-Appellants, Cross-Appellees.

No. 02-1702.

No. 02-1726.

No. 02-1925.

United States Court of Appeals, Seventh Circuit.

Argued October 31, 2002.

Decided February 20, 2003.

COPYRIGHT MATERIAL OMITTED

David A. Glockner (argued), Office of U.S. Attorney, Crim. Div., Chicago, IL, for U.S.

Matthias A. Lydon (argued), Winston & Strawn, Chicago, IL, for John Serpico.

Jeffrey Schulman (argued), Wolin & Rosen, Chicago, IL, Donald Hubert, Hubert, Fowler & Quinn, Chicago, IL, for Gilbert Cataldo.

Before RIPPLE, MANION, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

For 12 years, John Serpico and Maria Busillo held and abused various influential positions with the Central States Joint Board ("CSJB"), a labor organization that provides support to its member unions. Among other responsibilities, Serpico and Busillo controlled the management of the unions' money. The pair, along with longtime friend and business associate Gilbert Cataldo, collaborated on three schemes involving the misappropriation of the unions' funds. Two of those schemes are the focus of this appeal by Serpico and Cataldo (Busillo has not appealed her conviction).

In their "loans-for-deposits" scheme, Serpico and Busillo deposited large sums of union money in various banks. In exchange, the two received overly generous terms and conditions on personal loans totaling more than $5 million. In the more complicated hotel loan kickback scheme, several groups entered into the 51 Associates Limited Partnership, which planned to construct a hotel. The partnership was unable to obtain financing for the construction of the building without first securing a commitment for a mortgage loan that would guarantee repayment of the construction loan after the hotel was built. Serpico used union funds to make a mortgage loan to the developers, after which Mid-City Bank agreed to make the construction loan. In exchange for Serpico's help in securing the loan, 51 Associates paid $333,850 to Cataldo's corporation, Taylor West & Company, for "consulting services" that Cataldo never actually performed. Cataldo then kicked back $25,000 to Serpico by paying Serpico's share of a $50,000 investment into an unrelated business project (the Studio Network project) in which the two were partners.

Serpico, Busillo, and Cataldo were tried on charges of racketeering, mail fraud, and bank fraud. At the close of the evidence, the court granted motions by Serpico and Busillo for acquittal on the racketeering and bank fraud counts. The jury convicted Serpico and Busillo on mail fraud charges relating to the loans-for-deposits scheme and Serpico and Cataldo on mail fraud charges for the hotel loan kickback scheme.

At sentencing, the district court determined that Serpico and Cataldo were each responsible for a loss of $333,850, the amount paid to Cataldo, for the hotel loan kickback scheme. For the loans-for-deposits scheme, the court found the damage to the unions to be equal to the additional amount of interest the union assets would have earned had Serpico purchased CDs at banks offering the highest interest rates instead of those offering him special deals on his personal loans. The court totaled loans from Capitol Bank as well as six others, estimating the loss to be between $30,000 and $70,000. The court thus increased Serpico's base offense level of 6 by 9 levels, plus 2 levels for more than minimal planning and 2 levels for abuse of trust (19 total). Serpico and Cataldo were sentenced to 30 and 21 months in prison, respectively.

Serpico and Cataldo (collectively "Serpico" as we go forward) appeal, challenging the verdicts and the application of the sentencing guidelines on a number of grounds. In its cross-appeal, the government also contests the application of the sentencing guidelines.

First, Serpico argues that his convictions should be overturned because his schemes did not "affect" a financial institution. The 5-year statute of limitations for mail and wire fraud offenses under 18 U.S.C. § 3282 is extended to 10 years "if the offense affects a financial institution," 18 U.S.C. § 3293(2), and Serpico could not have been prosecuted without that extension. Serpico claims that an offense only "affects a financial institution" if the offense has a direct negative impact on the institution. The district court instructed the jury that the schemes affected the banks if they "exposed the financial institution[s] to a new or increased risk of loss. A financial institution need not have actually suffered a loss in order to have been affected by the scheme."

Although Serpico agreed to the jury instruction, he now points to United States v. Agne, 214 F.3d 47, 53 (1st Cir.2000) and United States v. Ubakanma, 215 F.3d 421, 426 (4th Cir.2000), to support his claim that the financial institution must suffer an actual loss. In Agne, however, the court found that the bank "experienced no realistic prospect of loss," so it did not have to reach the question of whether the bank must suffer an actual loss. Agne, 214 F.3d at 53. Similarly, Ubakanma simply held that "a wire fraud offense under section 1343 `affected' a financial institution only if the institution itself were victimized by the fraud, as opposed to the scheme's mere utilization of the financial institution in the transfer of funds." Ubakanma, 215 F.3d at 426. Neither side here argues that "mere utilization" is sufficient; the question is whether an increased risk of loss is enough, even if the institution never suffers an actual loss.

Several courts, including this one and the Fourth Circuit, which produced Ubakanma, have concluded that an increased risk of loss is sufficient in similar contexts. See, e.g., United States v. Longfellow, 43 F.3d 318, 324 (7th Cir.1994) (quoting United States v. Hord, 6 F.3d 276, 282 (5th Cir.1993) ("risk of loss, not just loss itself, supports conviction" for bank fraud)); United States v. Colton, 231 F.3d 890, 907 (4th Cir.2000); see also Pattern Criminal Federal Jury Instructions for the Seventh Circuit (1990), p. 217 (The mail interstate carrier wire fraud statute "can be violated whether or not there is any [loss or damage to the victim of the crime] [or] [gain to the defendant].").

More importantly, the whole purpose of § 3293(2) is to protect financial institutions, a goal it tries to accomplish in large part by deterring would-be criminals from including financial institutions in their schemes. Just as society punishes someone who recklessly fires a gun, whether or not he hits anyone, protection for financial institutions is much more effective if there's a cost to putting those institutions at risk, whether or not there is actual harm. Accordingly, we find no error in the district court's jury instruction.

Serpico next argues that, even if the district court correctly interpreted § 3292(2), his schemes did not "affect" a financial institution because they did not create increased risks for the banks involved in the schemes. Essentially, Serpico claims that the banks in both schemes were willing participants who would not have chosen to participate unless it was in their best interests (that is, factoring in the risks, they expected to make money on the deals). But the mere fact that participation in a scheme is in a bank's best interest does not necessarily mean that it is not exposed to additional risks and is not "affected," as shown clearly by the various banks' dealings with Serpico.

For example, the hotel loan kickback scheme affected Mid-City even though Mid-City believed it would make money on the deal. Mid-City made a $6.5 million construction loan, one it obviously would not have made if it believed the risks associated with the loan outweighed the expected payoff. But the loan, as all loans do, did carry some risk. Since Mid-City did not want to be a long-term real estate lender, it agreed to the loan only after Serpico misappropriated Midwest Pension Plan ("MPP") funds in making the MPP's $6.5 million end-mortgage loan (which meant that, if all went well, Mid-City would quickly be repaid). Therefore, Mid-City never would have been exposed to the risks of its loan absent Serpico's scheme because it never would have made the loan.

Serpico responds that MPP's $6.5 million essentially guaranteed the loan, so there was no risk to Mid-City. But, under the terms of the loan, if the hotel was not completed on time and under budget, the money MPP put up would be returned to it. That would leave Mid-City with a risky long-term loan it didn't want. On top of that, the kickback scheme increased the chances that the project would run into trouble. Certainly a construction project is more likely to be delayed when those running it and putting up the money for it are doing so illegally, making them subject to the disruption of investigation and arrest at any time.

The loans-for-deposits scheme shows even more dramatically that a bank can take on higher risk while acting in what it believes to be its own best interests. Banks, including Capitol Bank (which no longer exists as a result of punishments it received after pleading guilty to conspiring with Serpico and Busillo to defraud the CSJB entities), decided the benefits from the deposits made it worth the risk of loss resulting from the generous terms and conditions of the loans it gave Serpico. But the fact remained that the bank made risky loans at low interest rates that it never would have made absent the scheme.

In fact, at trial, Serpico's counsel told the court that "if the defendants were convicted of a loans-for-deposits scheme, that conduct in and of itself would mean that they affected a financial institution" and "I don't know I could conceivably argue that the particular scheme did not affect a financial institution." He now tries two arguments. In addition to arguing that the bank...