United States v. Grose
| Decision Date | 23 February 2012 |
| Docket Number | No. 10-6277,10-6277 |
| Parties | UNITED STATES OF AMERICA, Plaintiff - Appellee, v. DAVID GROSE, Defendant - Appellant. |
| Court | U.S. Court of Appeals — Tenth Circuit |
(W.D. Okla.)
ORDER AND JUDGMENT*Before LUCERO, HARTZ, and O'BRIEN, Circuit Judges.
A jury convicted David Grose, formerly the chief financial officer (CFO) of a publicly traded company, of three counts of wire fraud for the unauthorized transfer of $1 million from company coffers for personal use. At sentencing, the district court determined Grose's relevant conduct included the unauthorized transfer of $10 million to the chief executive officer (CEO) of the company over a period of four years, Grose's receipt of over $800,000 in kickbacks from an equipment vendor, and the loss of over$95 million to shareholders associated with the public announcement of the CEO's misconduct. Grose was sentenced to sixteen years imprisonment based on losses of over $100 million to more than 250 victims and ordered to forfeit $1 million. On appeal, he challenges the district court's instructions to the jury, the prosecutor's cross-examination of his character witness, his sentence, and the forfeiture order. We affirm.
In 2004, Grose was hired as the CFO for the Quest entities in Oklahoma. These entities included Quest Resource Corporation and Quest Energy Partners L.P., both publicly traded companies, and Quest Midstream Partners L.P., a private corporation (collectively, "Quest").1 Quest was involved in various aspects of gas and oil production. Although the charges in Grose's indictment were based solely on his unauthorized transfer of $1 million of Quest's funds, his sentence was also based on the $10 million in transfers he arranged for Cash and Grose's acceptance of kickbacks.
In April 2008, Quest purchasing agent Brent Mueller was informed by a former business acquaintance, Ralph Ashley, that Ashley and two of his associates had a new product, a "hydrogen kit," which could be attached to vehicles to achieve significant gas economy. Ashley invited Quest representatives and representatives from other energy companies to view a demonstration of the product. Mueller and Grose attended the demonstration on behalf of Quest and were impressed. Shortly after the demonstration,Grose and Mueller approached Ashley to discuss making a personal investment in Ashley's new company, Oklahoma Hydrogen Gas Technologies (Hydrogen). Grose and Mueller eventually agreed they would invest $1 million for start-up costs in return for a share of Hydrogen's future profits. Grose agreed to personally provide the funding and told Mueller he planned to sell his stock in Quest to finance the purchase.
The two men reported their favorable assessment of the product to Jerry Cash, Quest's CEO. Cash authorized the purchase of ten hydrogen kits, at a cost of $42,000, to determine whether Quest would be interested in placing the device on its fleet of vehicles. Eventually only two devices were installed, one on Mueller's company vehicle and one on Grose's company vehicle.
Grose did not sell his Quest stock. Instead, at the end of June 2008, he had Mueller place an order for $1 million to Reliable Pipe & Equipment (Reliable) for the pipe Quest would need in 2009. Quest received Reliable's invoice on June 30, 2008. The same day, Mueller and Grose met with an attorney to prepare and file incorporation paperwork for a limited liability company, Affiliated Energy Partners (Affiliated Energy), in which Mueller and Grose were the only partners. In addition, they had the attorney draft a loan agreement between Affiliated Energy and Hydrogen for $1million.
On the morning of July 1, 2008, Grose wired the payment to Reliable. Before the payment had reached Reliable's bank account, however, Grose e-mailed Reliable and cancelled the order. He directed Reliable to re-wire the funds to Hydrogen rather than returning the money to Quest. The $1 million was transferred to Hydrogen the same day.
Shortly after Grose arrived at Quest in 2004, Cash and Grose agreed to transfer funds from the company to Cash's personal account established in the name of Rockport Energy Partnership (Rockport) and under his sole control. According to Grose, Cash told him Rockport was a "scouting" organization for Quest and the transfers were authorized by the board. (Vol. IV at 93.) According to Cash, Grose told Cash the "line of credit" to his personal account was permissible and would not appear on the company's books as long as it was repaid prior to the close of the company's quarterly reports. (Vol. IV at 66.) At first, Cash timely repaid the money transferred to the Rockport account. But by the fourth quarter of 2005, Cash's account did not have sufficient funds to repay the money he had borrowed. To cover the shortfall, Cash wrote a check from his account to Quest and Grose entered the check in the company books as available cash. However, Grose immediately transferred the funds back into Cash's account to cover the check. This arrangement continued until mid-2008. At that point, Cash had "borrowed" over $10 million from Quest which he was unable to repay. Neither Cash nor Grose informed any of the Quest board members what was occurring.
In late 2005, a Quest equipment and pipe supplier offered Grose and Mueller "an offer they couldn't refuse." (Supp. App'x at 74.) The vendor agreed to pay them one third each of the sales profits from his company. Although the vendor never specifically told them the profits would be generated by sales to Quest, approximately 90% of thevendor's pipe sales and 100% of its equipment sales were made to Quest. The payments continued until August 2008. Over that time, Grose received $849,670.56 in payments.
Grose's financial manipulations began to unravel at the end of the first quarter of 2008. The April wire transfer from Quest returning funds to Cash's account was missing information. Because of the delay, the check from Cash to Quest was returned for insufficient funds. Although the problem was resolved a few days later, the transfers caught the eye of an outside auditor, David Mayfield, in July 2008.
In early July, Cash walked into Grose's office while Grose was on the telephone with Mayfield. Mayfield was inquiring into the purpose of the transfers. Grose explained the Rockport account was created to reserve funds for potential acquisitions in the event Quest did not want competitors to know it was entering a specific market. Mayfield told Grose the money needed to be returned to Quest and, if it was, he would not pursue the matter.
The transfer also came to the attention of Jack Collins, who went to work for Quest in December 2007. In July 2008, Collins was preparing a forecast for future operations of a newly acquired company which would need an infusion of capital. When Quest's cash balance appeared to be lower than it should be, Collins asked the assistant controller why this was so. The controller responded there was a consistent transfer of $10 million at the beginning of each quarter. Collins notified David Lawler, Quest's chief operating officer. On July 29, 2008, Lawler e-mailed Grose (copying Cash and several other Quest employees) to inform Grose he had learned Rockport was holding$10 million belonging to Quest and the money should be returned for use by Quest for other projects. Cash responded the money would be returned.
Cash then disappeared for a few days. In the meantime, several board members had been approached by the Oklahoma Securities Department asking about the $10 million transfers. An emergency meeting of the board members of all three Quest entities was scheduled for August 22, 2008. The members determined Quest would demand Cash's resignation and Grose would be placed on administrative leave while the company conducted an internal investigation. On August 25, 2008, Quest issued a press release stating Cash had resigned, Grose had been placed on leave, and Lawler was the newly appointed CEO. The next day, Quest's stock price took a precipitous drop.
After the transfers to Cash were questioned and before he was placed on leave, Grose made several attempts to recoup the million dollars he had used to invest in Hydrogen. Direct requests to Ashley to repay the funds revealed the money had been spent by Hydrogen on start-up costs and unexpected problems with the product had prevented sales. Grose unsuccessfully tried to find substitute investors. After being placed on leave, Grose no longer had access to Quest's books.
During its year-end reconciliation, Quest discovered the paid invoice to Reliable but was unable to locate any pipe delivery. Jack Collins, Quest's interim CFO, called Reliable and was told that Grose had cancelled the order. Reliable provided Collins with a copy of Grose's e-mail instructing the transfer of the funds to Hydrogen. Collins attempted to telephone Hydrogen but the calls went unanswered. He then drove to Hydrogen's business address only to find another company was leasing the space and ithad no knowledge of Hydrogen. Collins eventually learned Hydrogen was no longer in business.
Quest terminated Grose's employment. An ensuing federal investigation later uncovered the vendor's kickbacks to Grose and Mueller from 2005 through 2008. At trial, Mueller testified he met with Grose while the Quest investigation was ongoing and Grose told him they should blame everything on Cash.
On June 16, 2009, Grose was indicted on three counts of wire fraud based on the transfer of Quest's funds to Reliable, the cancellation of the order, and Reliable's transfer of the funds to Hydrogen. A jury convicted him on all three counts. The presentence report (PSR) included the $10 million transfer to Cash and the kickback scheme as relevant conduct under USSG §1B1.3(a)(1...
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