U.S. v. Zauber

• Citation: 857 F.2d 137
• Decision Date: 10 November 1988
• Docket Number: Nos. 87-5292,Nos. 87-5292 and 88-5244,Nos. 87-5294 and 88-5246,Nos. 87-5293 and 88-5245,s. 87-5292 and 88-5244,s. 87-5293 and 88-5245,s. 87-5294 and 88-5246,s. 87-5292
• Parties: UNITED STATES of America, Appellee, v. Kenneth P. ZAUBER, Appellant atUNITED STATES of America, Appellee, v. Robert COAR, Appellant atUNITED STATES of America, Appellee, v. Frank SCOTTO, Appellant atto 87-5294 and 88-5244 to 88-5246.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 137

857 F.2d 137

UNITED STATES of America, Appellee, v. Kenneth P. ZAUBER, Appellant at Nos. 87-5292 and 88-5244.

UNITED STATES of America, Appellee, v. Robert COAR, Appellant at Nos. 87-5293 and 88-5245.

UNITED STATES of America, Appellee, v. Frank SCOTTO, Appellant at Nos. 87-5294 and 88-5246.

Nos. 87-5292 to 87-5294 and 88-5244 to 88-5246.

United States Court of Appeals Third Circuit.

Argued April 13, 1988.

Decided Aug. 31, 1988.

As Amended on Denial of Rehearing and Rehearing In Banc Nov. 10, 1988.

Roanne L. Mann (argued), Stein, Zauderer, Ellenhorn, Frischer & Sharp, New York City, for appellant Kenneth P. Zauber.

Michael R. Perle (argued), Hayden & Perle, Hoboken, N.J., for appellant Robert Coar.

Robert E. Margulies (argued), Clifford A. Herrington, Margulies, Wind, Herrington & Katz, Jersey City, N.J., for appellant Frank Scotto.

Samuel P. Moulthrop, Chief, Appeals Div., Marion Percell, Asst. U.S. Atty. (argued), Newark, N.J., for appellee.

Before BECKER, HUTCHINSON and SCIRICA, Circuit Judges.

OPINION OF THE COURT

HUTCHINSON, Circuit Judge.

I. INTRODUCTION

Appellants Robert Coar and Frank Scotto were indicted, ¹ tried and convicted of mail and wire fraud pursuant to 18 U.S.C.A. Secs. 1341 (West 1984) and 1343 (West 1984) and of conspiring to violate 18 U.S.C.A. Sec. 1962(c) (West 1984) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), in violation of 18 U.S.C.A. Sec. 1962(d) (West 1984) in the United States District Court for the District of New Jersey. Appellant Kenneth P. Zauber was convicted of mail fraud, RICO conspiracy and accepting kickbacks in connection with an employee pension benefit plan in violation of 18 U.S.C.A. Sec. 1954 (West 1984) in the same court. All three were tried together. The district court denied their acquittal and new trial motions and sentenced them to prison terms and $25,000 fines. After they filed their appeal, the Supreme Court issued its decision in McNally v. United States, --- U.S. ----, 107 S.Ct. 2875, 97 L.Ed.2d 292 (1987). Although McNally was not considered by the district court, we are bound to consider it on appeal. United States v. Asher, 854 F.2d 1483, 1487 (3d Cir.1988); see also Griffith v. Kentucky, 479 U.S. 314, 107 S.Ct. 708, 716, 93 L.Ed.2d 649 (1987) (new constitutional rules to be applied retroactively to all criminal cases on direct review or not otherwise final, with no exception when new rule is "clear break" with past). Because we find that the indictment fails to sufficiently allege mail and wire fraud violations under McNally, we will vacate appellants' mail and wire fraud convictions and dismiss those portions of the indictment that charge Secs. 1341 and 1343 violations. As to the remaining RICO conspiracy and Sec. 1954 convictions, we will affirm and remand to the district court for resentencing.

II. FACTS

Coar and Scotto were lifetime trustees of the International Brotherhood of Teamsters, Local 701's employee pension benefit plan ("pension fund"). Zauber replaced David Friedland as general counsel to the pension fund in 1979. ² Friedland was convicted in 1980 of receiving kickbacks in connection with a loan of pension fund monies.

In the spring of 1982, Friedland and Joseph Higgins ³ agreed to try to obtain money from the pension fund to invest in Higgins's Omni Funding Group ("Omni"), a Florida-based mortgage company. ⁴ Because of his earlier conviction, Friedland was to be a hidden partner in Omni. Friedland told Higgins that he would discuss the matter with Coar and Scotto, who trusted him. Friedland later reported back to Higgins they would have to pay kickbacks to Coar and Scotto to obtain the money.

Higgins mailed an investment proposal to the pension fund in June, 1982. His letter was the basis for a mail fraud count against Friedland, Coar and Scotto. After a formal presentation, Higgins and the Higgins testified that sometime after the presentation, he, Friedland, Coar and Scotto had a meeting at a New York restaurant called "Paul and Jimmy's." The purpose of this meeting was to give Coar and Scotto an opportunity to "look over" Higgins and discuss the Omni investment in general.

trustees entered into negotiations. Zauber conducted a superficial "due diligence" investigation into Higgins and Omni, and reported favorably on them. At some point pension fund manager Alfred Piperata became suspicious of Higgins and conducted his own investigation. His inquiry revealed Higgins's prior bankruptcy, IRS and repossession problems, as well as his long-time friendship with David Friedland. When Piperata expressed concern to the appellants, he was told not to worry about it.

In October, 1982, Higgins and the pension fund entered into a formal contract. The pension fund agreed to transfer $20,000,000, presently invested with the Magten Asset Management Corporation ("Magten"), to Omni for a thirty-year period. On this investment the pension fund was to set a return 1% higher than the six-month treasury bill rate on residential mortgages and 2% over the treasury rate on commercial mortgages. Omni was to retain any profit above those rates. Commercial loans using pension funds could not exceed 10% of the corpus. Residential loans were to require 100% insurance, and commercial loans 15% insurance. The contract also contained express provisions barring individuals with prior convictions, like David Friedland, from any involvement in Omni. Zauber's fiance, an associate at a Wall Street law firm, "independently" reviewed the contract.

The $20,000,000 was transferred to Omni in two separate transactions, $15,000,000 by wire and $5,000,000 by mail. These transactions formed the basis for mail and wire fraud counts against Friedland, Coar and Scotto.

In late November, 1982, Omni was having trouble obtaining insurance on the loans. Higgins proposed changing the investment contract to allow for a 15% holdback on each loan in lieu of insurance or a letter of credit. By letter of December 6, 1982, Zauber approved Higgins's proposed interpretation of the contract. This letter was the basis of a mail fraud count against Zauber and Friedland.

Higgins testified that he, Coar, Scotto and Friedland had a second lunch meeting at "Paul and Jimmy's" sometime in late 1982. At that meeting, Friedland requested that all communications between Omni and Coar and Scotto be made through him, rather than Higgins. Friedland also discussed kickbacks and told Coar and Scotto that their share would come from his half of Omni's profits.

At trial, Higgins testified that Zauber approached him for money on at least six separate occasions beginning in late 1982. ⁵ Higgins repeatedly directed Zauber to Friedland and gave Friedland money to pay off Zauber, Coar and Scotto. ⁶

In January of 1983, four new trustees joined Coar and Scotto on the board of the pension fund. ⁷ The new trustees were told that the "old" trustees would be solely responsible for any liability on prior investments and would continue to monitor them.

In late 1983, however, the new trustees learned this was incorrect and became aware of their own responsibility, as fiduciaries, for continuing investments made by the fund. They also learned that the Magten investment was paying 17% while Omni was paying approximately 9% overall. The new trustees began their own investigation into Omni. After a trip to Florida to learn more about Omni, they discovered that Omni had been violating the investment contract by making loans in excess of the 10% corpus limit. Higgins, Friedland and Zauber attempted to cover up these loans by backdating a letter from Zauber authorizing loans in excess of the 10% limit. The new trustees also discovered that many of Omni's loans were in default, and that Omni was making interest payments to the pension fund from the 15% holdback accounts in violation of the investment contract. After the Department of Labor initiated an investigation, Coar and Scotto resigned from the board, Zauber was fired, and the new trustees terminated the pension fund's investment contract with Omni.

III. THE McNALLY ISSUES

A.

The mail fraud statute, 18 U.S.C.A. Sec. 1341, provides, in pertinent part:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ... for the purpose of executing such scheme or artifice or attempting to do so, [mails, receives in the mail or causes the mails to be used] shall be fined not more than $1,000 or imprisoned not more than five years, or both.

The wire fraud statute, 18 U.S.C.A. Sec. 1343, employs similar language and applies to the use of transmissions by wire, radio, or television communication in interstate or foreign commerce to further a scheme to defraud. ⁸ Because the district court did not review the indictment for a McNally deficiency, our standard of review is plain error. Fed.R.Crim.P. 52(b). The same standard of review and analysis apply to both fraud statutes. Carpenter v. United States, --- U.S. ----, 108 S.Ct. 316, 320 n. 6, 98 L.Ed.2d 275 (1987); United States v. Evans, 844 F.2d 36, 37 (2d Cir.1988).

On review of defendants' mail and wire fraud convictions, we must look to see whether the indictment alleged, and the jury was charged, that the defendants schemed to defraud the pension fund of tangible property. McNally, 107 S.Ct. at 2882; Asher, 854 F.2d at 1496. The government need not, of course, prove that the scheme was successful in order to sustain a conviction for mail fraud. United States v. Pearlstein, 576 F.2d 531, 542 (3d Cir. 1978). Allegations of lost "intangible" rights are insufficient, without more, to support an indictment charging violations of the mail and wire fraud statutes. Intangible rights include the public's right to have government officials perform their duties honestly. McNally, 107 S.Ct. at 2881. They also include an employer's right to the honest and...