U.S. v. United Medical and Surgical Supply Corp.

Decision Date29 March 1993
Docket Number92-5242 and 92-5243,Nos. 91-5844,s. 91-5844
Citation989 F.2d 1390
PartiesFed. Sec. L. Rep. P 97,402, 38 Fed. R. Evid. Serv. 462 UNITED STATES of America, Plaintiff-Appellee, v. UNITED MEDICAL AND SURGICAL SUPPLY CORPORATION; C. Donald Stone, Defendants-Appellants. UNITED STATES of America, Plaintiff-Appellee, v. Robert Morris BUCHANAN, Jr., Defendant-Appellant. UNITED STATES of America, Plaintiff-Appellee, v. C. Donald STONE, Defendant-Appellant.
CourtU.S. Court of Appeals — Fourth Circuit

Eugene LeRoy Nettles, Sr., Nettles, Turbeville & Reddeck, Lake City, SC, Robert Woodford Sneed, Jackson, MS, argued (Marian Dawn Nettles, Nettles, Turbeville & Reddeck, Lake City, SC, Robert Lowry Wylie, III, Greenville, SC, Charles F. Blackburn, Sr., Perry, Kittrell, Blackburn & Blackburn, Henderson, NC, Cameron B. Littlejohn, Jr., Lewis, Babcock & Hawkins, Columbia, SC, on the brief), for defendants-appellants.

Mary Gordon Baker, Asst. U.S. Atty., Charleston, SC, argued (John S. Simmons, U.S. Atty., Tammy G. Harthcock, Sp. Asst. U.S. Atty., Clarence Davis, Office of the U.S. Atty., on the brief), for plaintiff-appellee.

Before MURNAGHAN, LUTTIG, and WILLIAMS, Circuit Judges.

OPINION

WILLIAMS, Circuit Judge:

This case arose out of a sixteen million dollar bond issue used to finance the development and construction of the Skylyn Hall Retirement Center in Spartanburg County, South Carolina. Robert M. Buchanan, Jr., C. Donald Stone, Unico Development Services, Inc., and United Medical and Surgical Supplies Corporation 1 were convicted of securities fraud, mail fraud, and conspiracy to violate federal securities law for their roles in the offer and sale of Skylyn Hall bonds. On appeal, the Defendants challenge their convictions and present five issues for our review:

(1) whether the district court erred in failing to dismiss the indictment on the basis of the applicable statute of limitations;

(2) whether the district court erred in concluding that a plea agreement signed by Stone in an earlier case did not bar his prosecution in this matter;

(3) whether the district court erred in concluding that there was sufficient evidence to support Buchanan's convictions and in denying his motion for a judgment of acquittal or, in the alternative, for a new trial;

(4) whether the district court abused its discretion by limiting the Defendants' cross-examination of one of the Government's expert witnesses; and,

(5) whether the district court abused its discretion by giving a prejudicial supplemental instruction in response to a jury question.

Finding no error, we affirm.

I.

The facts in this case are long, complicated, and vigorously contested by the various parties. When viewed in the light most favorable to the Government, see United States v. Garcia, 868 F.2d 114, 115 (4th Cir.) (appellate courts reviewing the sufficiency of the evidence must examine the facts in the light most favorable to the government), cert. denied, 490 U.S. 1094, 109 S.Ct. 2439, 104 L.Ed.2d 995 (1989), the trial testimony established the following facts.

In 1983, the Reverend C. Benjamin Smith decided to build a retirement center in Spartanburg, South Carolina, which he planned to name Skylyn Hall. In late 1983, Smith engaged the accounting firm of Ernst & Whinney to perform a feasibility study on the proposed Skylyn Hall project. The preliminary report recommended that the 170-unit project have a pre-sale requirement of fifty percent. 2 Ernst & Whinney did not complete the final feasibility report because Smith was unable to obtain private financing for the project from a local bank. As a result, Smith called Buchanan to inquire whether his brokerage firm, Buchanan & Company, Inc., would underwrite the project. 3 Buchanan informed Smith that he would not participate unless Stone was also involved.

Smith, who had previously worked for Stone as a health care consultant at both Unico and United Medical, telephoned Stone on April 10, 1984. At Stone's request, Smith travelled to Greenville to discuss the Skylyn Hall project with Stone. During this meeting, Smith asked Stone for his assistance in bringing the project to fruition. The two men agreed that the project should be financed through a municipal bond issue using a nonprofit corporation as the project's owner. When Smith inquired how long it would take to close the bond issue, Stone responded that it would not take long because he had a nonprofit corporation, Retirement Horizons, "in his pocket." (3 Tr. 212.) 4 At the end of this meeting, Smith gave Stone a copy of the Ernst & Whinney preliminary feasibility study, and Stone said he would consider working on the project.

Within ten days, Stone sent Smith a one page Sources and Use Summary. The Summary stated that the proposed project would be a 200-unit facility financed by a $15 million bond issue. It also listed a $450,000 development fee, which was to be paid to Stone.

Smith believed he was entitled to a portion of the development fee because he had originated the idea of building Skylyn Hall and had spent a considerable amount of time attempting to develop the project prior to seeking Stone's assistance. After discussions with Stone, Smith drafted an agreement that named Unico as the project's developer and required Unico to pay Smith's company, Benan, Inc., $150,000 as a co-development fee. According to Smith, he lost all control of his project to Stone when he signed this contract.

Once Stone seized control of the Skylyn Hall project, he commissioned the accounting firm of MayZima & Company to perform a new feasibility study. Stone also negotiated a contract with Jerry Ingle of Salem Construction to be the project's contractor and named United Medical as the project's furniture, fixtures, and equipment (FFE) supplier. Stone also selected Retirement Horizons, a nonprofit corporation, to be the actual owner of Skylyn Hall, and Heritage Living, a company owned by the husband of Stone's secretary, to be a marketing consultant for the project. Smith was relegated to the position of project marketer.

Stone also asked Buchanan to be the project's underwriter. Buchanan agreed and named John Low of Low & Furby as underwriter's counsel. One of the major responsibilities of Buchanan, as underwriter, was to "inquire, investigate, and disclose" all material information concerning Skylyn Hall so that the information could be included in the Official Statement. 5 (J.A. at 295.) The Official Statement was compiled by Low & Furby from information obtained from Buchanan, Stone, Smith, Heritage Living, and all other entities to be involved in the development, construction, or early operation of the facility and was completed shortly before the bond closing on May 30, 1985.

At trial, several government witnesses testified that the Official Statement contained various misstatements and omissions of material fact. For example, the Official Statement did not disclose that there was a co-development contract between Unico and Benan or that Unico agreed to pay Benan $150,000 for development services. It also failed to disclose that Ernst & Whinney performed an earlier feasibility study which recommended only a 170-unit project with a fifty percent pre- sale requirement, rather than a 200-unit facility.

Furthermore, the Official Statement contained an inaccurate listing of disbursements to be paid from the bond proceeds. It stated that the furniture, fixtures, and equipment contract (the FFE contract) provided for the furniture, fixtures, and equipment necessary for the project at the cost of $698,500. The Official Statement did not disclose that certain items were missing from the FFE contract, such as the carpeting, refrigerators, ranges, and range hoods. The Official Statement also failed to disclose that United Medical signed separate agreements to provide the missing fixtures and equipment for an additional $524,000 to be paid from the bond proceeds. Thus, the Official Statement inaccurately reported the total amount of money to be paid for the construction of the project by over $500,000.

The Government also produced testimony that in the Official Statement the Defendants should have disclosed Buchanan and Stone's poor track record with municipal bond issues securing the construction of health care facilities. As of January 1983, Buchanan & Company was involved in thirty-six bond issues that were experiencing financial difficulties or that had gone into default. Of these projects, approximately thirty bond issues were for retirement centers or nursing homes. In addition, a number of these projects were not only underwritten by Buchanan & Company, but were also developed by Stone and Unico. All of these problem projects were detailed in a memorandum sent to Buchanan. Low testified that had he been aware of the number of failing projects or had he seen the memorandum, he would have disclosed the general problems with retirement facility bond issues in the Official Statement.

Moreover, while the Official Statement did list several projects developed by Stone, it did not explain that a number of these projects were experiencing financial troubles. Thomas Snyder, an attorney qualified by the district court as an expert in broker/dealer compliance in the areas of underwriting and securities law, testified that the failure to disclose all of the negative information concerning these projects rendered the Official Statement misleading because it led the prospective investor to believe that they were successful projects.

The Official Statement also failed to disclose that the Skylyn Hall bond issue did not comply with Buchanan & Company's internal requirements for retirement center bond issues. Prompted by the number of failing bond issues used to finance retirement centers, Robert Fairly, Buchanan & Company's Executive Vice President, sent Buchanan and the underwriting department a memo entitled "Underwriting...

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