U.S. v. Shelton

• Citation: 669 F.2d 446
• Decision Date: 21 January 1982
• Docket Number: 79-2104 and 79-2157,Nos. 79-2101,79-2102,79-2103,s. 79-2101
• Parties: 82-1 USTC P 9166, 9 Fed. R. Evid. Serv. 1299 UNITED STATES of America, Plaintiff-Appellee, v. Lewis F. SHELTON, James Darrough, John Derry, Donald Burks, and Carl Bledsoe, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 446

669 F.2d 446

82-1 USTC P 9166, 9 Fed. R. Evid. Serv. 1299

UNITED STATES of America, Plaintiff-Appellee, v. Lewis F. SHELTON, James Darrough, John Derry, Donald Burks, and Carl Bledsoe, Defendants-Appellants.

Nos. 79-2101, 79-2102, 79-2103, 79-2104 and 79-2157.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 1, 1980.

Jan. 21, 1982.

Richard Hollis, Bruce D. Locher, Marilyn J. Schroeder, Springfield, Ill., Giles A. Franklin, Chicago, Ill., John R. Martin, Atlanta, Ga., for defendants-appellants.

Thomas W. Turner, Asst. U. S. Atty., Springfield, for plaintiff-appellee.

Before SPRECHER and CUDAHY, Circuit Judges and WILL, Senior District Judge. ^*

CUDAHY, Circuit Judge. ^**

The five defendants ¹ involved in these criminal appeals were indicted by a federal grand jury for conspiracy to commit mail fraud and 77 substantive counts of mail fraud arising out of the establishment of a farmers cooperative in southern Illinois. Defendants Derry, Shelton and Darrough were also indicted for income tax evasion involving the proceeds from their allegedly fraudulent scheme. 26 U.S.C. § 7201 (1976). After a lengthy trial, the defendants were all found guilty of conspiracy as well as some but not all of the mail fraud counts. The jury also returned a verdict of guilty with respect to the tax evasion counts. Defendants have raised numerous questions on appeal regarding the sufficiency of the evidence, the instructions, various evidentiary rulings and the propriety of their sentences. We affirm in all respects except as to defendants Burks and Bledsoe, whose judgments of conviction are vacated and remanded for resentencing.

I. The Farmers Cooperative Scheme

In what seems to be a bucolic variant of a "Ponzi scheme," ² the defendants sought out investors in 1975 who would buy stock in a management company, First National Management ("FNM"). FNM was then supposed to use the proceeds of the stock sale as a loan to establish the Illinois Farmers Marketing Association ("IFMA"), which was in fact a farmers cooperative. IFMA was to be further funded by long-term unsecured promissory notes sold to individuals and known as Harvester Agreements. The Harvester Agreements were 20 year loans by farmers to IFMA at a 7% annual rate of interest. Farmers could invest in IFMA by one lump-sum payment of $4,000, 3 annual payments of $1,400 or 20 annual payments of $360. In consideration of making these loans, the farmers became members of the cooperative and eligible both to sell farm products and to purchase supplies at facilities that would be established by the cooperative. Members also shared in a small percentage of the gross sales volume of the cooperative's stores. The capitalization for the cooperative was intended to be supplied by the Harvester Agreement loans together with a loan of $150,000 from FNM. FNM's stockholders were then expected to receive a return on their investment through management and consulting fees for services rendered by FNM to IFMA during the first six months of the cooperative's existence and through a share of FNM's 2% override of IFMA's gross sales. FNM's management and consulting fees were based upon a percentage of IFMA's receipts from the proceeds of the Harvester Agreement loans. FNM's shareholders assigned all these fees payable to FNM to Shelton, Darrough and Derry in a series of partial assignments. Gov't Exs. 87Q, 87R and 87S.

Both FNM and IFMA were successful at raising considerable sums of money. As time passed, however, investors became disgruntled over the apparent lack of progress towards the establishment of facilities for the cooperative. On March 22, 1976, this grumbling reached its peak. A meeting was held and new directors were added to the board of FNM to dilute the defendants' control. On March 23, 1976, the investors stormed the offices of the cooperative, broke down the door and seized the corporate records. As of March 23, 1976, the defendants' involvement in the scheme had effectively ended.

In retrospect, the most difficult problem in the entire arrangement from the point of view of investors was that the "management and consulting fees," sales commissions and expenses incurred during the first year left FNM and IFMA so underfunded that the grocery stores, grain elevators and meat packing plants supposedly planned by the cooperative remained an improbable, if not impossible, dream. The financial shortfall occurred despite the impressive sums of money that were raised by FNM and IFMA in a short time during 1975-1976. Thus defendants Darrough, Shelton, Derry and Fenoglio sold $222,000 in FNM stock. ³ Only $32,500 of the cash proceeds was actually loaned to FNM. But disbursements of over $125,000 to the defendants and other disbursements for operating expenses left FNM with a cash balance of $2,437 on March 26, 1976. ⁴ In addition, IFMA itself raised approximately $645,000 through the Harvester Agreement loans. Most of this money, $503,000, was paid out in sales commissions and consulting fees. Operating expenses consumed most of the remainder and IFMA had only $27,448 on hand when the scheme collapsed. Over $830,000 was paid out by FNM and IFMA in less than a year with little or nothing to show for the expenditures. The roles of the five defendants involved in this appeal in this financial disaster will be detailed further as we consider the sufficiency of the evidence with respect to each defendant.

II. The Sufficiency of the Evidence on the Conspiracy Count

The crime of conspiracy is an agreement to violate the law. United States v. Craig, 573 F.2d 455, 485 (7th Cir. 1977), cert. denied, 439 U.S. 820, 99 S.Ct. 82 58 L.Ed.2d 110 (1978). Such an agreement is rarely susceptible of proof by direct evidence but may be inferred from circumstantial evidence. Glasser v. United States, 315 U.S. 60, 80, 62 S.Ct. 457, 469, 86 L.Ed. 680 (1942). The defendants in the instant case were charged with conspiracy to commit mail fraud. 18 U.S.C. § 371 (1976). This offense requires that the fraudulent scheme be the object of the conspiracy and that it be reasonably foreseeable that the mails will be used in furtherance of the scheme. Craig, 573 F.2d at 486. ⁵

a) Defendants Burks and Bledsoe

Our melancholy tale begins with the exploits of defendants Burks and Bledsoe, for it was by dint of their entrepreneurial efforts that this fraud came to Illinois. Like most successful frauds, the farmers cooperative scheme had been used before. Thus, from 1972 to 1977, a similar farmers cooperative scheme operated in Missouri, Oklahoma and Arkansas. ⁶ Defendants Burks and Bledsoe were particularly involved in the operation of the Progressive Farmers Association ("PFA"), the Missouri counterpart of the IFMA.

In late 1974, Burks contacted an acquaintance in Illinois, James Fenoglio, about a possible business venture. Defendants Burks and Bledsoe then flew to Illinois and presented the farm cooperative idea to Fenoglio based upon the purported (but illusory) success of PFA in Missouri. Burks and Bledsoe agreed, for a fee of $50,000 due in two installments of $25,000 each, to help Fenoglio establish an Illinois cooperative. Personal problems prevented Fenoglio from acting on the idea, however, at that time.

In March of 1975, Burks contacted Fenoglio again and indicated that he had two people to "help" Fenoglio get the Illinois cooperative off of the ground. Burks sent defendants Shelton and Darrough to "help" Fenoglio although Fenoglio quickly assumed a secondary role in the Illinois venture.

Burks and Bledsoe agreed to assist Fenoglio in setting up the Illinois farm cooperative. As stated in their agreement:

(o)ur assistance will be in the nature of setting up your administrative offices and all the procedures necessary for a smooth functioning operation. We will hold your first sales training school and your first sales meeting. We will be available during the first twelve months for consultation and advice as needed to properly build your organization. Our fee for this service will be a total of $50,000.00 in cash; $25,000.00 payable upon the completion of your stock offering in the management and consulting corporation. The other $25,000.00 will be due and payable by the Co-op upon the completion of issuing 500 instruments.

Gov't Ex. 92C.

Burks and Bledsoe supplied examples of various PFA documents including the sales "pitch book" used to persuade farmers to loan money to the cooperative. This pitch book contained numerous misrepresentations regarding, inter alia, the safety of the farmers' investment, its alleged "deposit" characteristics and the rate of return for farmers who did not continue to make the annual $360 loan to the cooperative. The IFMA virtually copied the PFA documents and pitch book supplied by Burks and Bledsoe.

Burks also addressed two meetings of FNM investors and IFMA salesmen. He glowingly described the PFA operations in Missouri and falsely stated that PFA investors had just received a dividend of $148.00. Tr. IIID at 35. At that time, PFA was losing money at a considerable rate and had not paid any dividends. Burks argues that he was unaware of the magnitude of PFA's losses and that PFA's financial statements actually revealed a profitable operation. These statements were based upon a surrealistic accounting system, however, whereby borrowed capital funds from the Missouri counterpart of the Illinois Harvester Agreements were treated as "income" with no resultant increase in PFA's liabilities. Certainly, there were no profits based on anything even the most "creative" accountant would reasonably regard as "income" and "expenses." We believe that the jury could have inferred, based upon Burks' position as President of PFA, that he was quite aware of PFA's precarious financial status. See also Gov't Ex. 83T-3 (PFA financial statement of March 1975 with Burks' name on it).

In addition, Burks stated in 1977 to a Missouri law enforcement officer that PFA had...