United States v. Moraites, 71-1495.

Decision Date09 February 1972
Docket NumberNo. 71-1495.,71-1495.
Citation456 F.2d 435
PartiesUNITED STATES of America v. Peter MORAITES et al. Appeal of John PENSEC, Appellant.
CourtU.S. Court of Appeals — Third Circuit

Stephen N. Dermer, Lowenstein, Sandler, Brochin, Kohl & Fisher, Newark, N. J. (Matthew P. Boylan, Newark, N. J., on the brief) for appellant John Pensec.

John W. Bissell, Asst. U. S. Atty., Newark, N. J. (Herbert J. Stern, U. S. Atty., Newark, N. J., William Braniff, Asst. U. S. Atty., on the brief), for appellee.

Before KALODNER, STALEY and ADAMS, Circuit Judges.

OPINION OF THE COURT

STALEY, Circuit Judge.

Appellant, John Pensec, was convicted following a jury trial of conspiracy to misapply bank funds in violation of 18 U.S.C. § 371. In addition, appellant was convicted of three substantive charges of misapplication of bank funds in violation of 18 U.S.C. §§ 656 and 2 and was acquitted of two counts charging him with accepting fees for procuring bank loans.

Appellant had been indicted with several other individuals and a number of corporations in a 61-count indictment. The Government then elected to sever its case against the corporations and three of the individuals and proceed to trial against appellant and one Peter Moraites. Moraites later pleaded guilty to two counts charging violation of 18 U.S.C. § 215 and was also severed. Appellant Pensec was then tried on a restructured indictment, all but six counts having been dismissed.

At all times relevant to the indictment, appellant had been chief operating officer of Midland Bank, Paramus, New Jersey ("Midland"). The Government alleged that appellant Pensec, together with Moraites, a member of Midland's board of directors, involved Midland Bank for the first time in a specialized type of lending, that of loans to the ocean shipping industry. The Government admits that these ship loans had the initial approval of Midland's board of directors, with certain specified limitations regarding types of collateral and dollar amounts. The Government's theory is that these loans began to fail and because of insufficient collateral, Midland faced large losses. The Government contends that Pensec and Moraites, in an effort to avoid these losses, poured more and more of Midland's cash funds into unsecured and uncollateralized loans. This cash was used to keep the various ships in operation until the loans could be repaid.

I. THE EVIDENCE

The following is a capsulized version of the evidence. The Government is, by virtue of the jury's verdict, entitled to have this evidence viewed in the light most favorable to the prosecution. United States v. De Cavalcante, 440 F.2d 1264 (C.A.3, 1971).

Appellant became chief operating officer of the Midland Bank in late 1964. From 1964 until 1968, he was a member of Midland's board of directors as well as a member of the board's executive committee. Commencing in 1965, Director Moraites presented to Midland's board of directors a program for ship loans which he urged Midland to undertake.1 At the outset, each loan was presented either to the board or to the executive committee for approval. Beginning in early 1966, the board established dollar limitations for the total amount of ship loans that it would permit to be outstanding. The board delegated its authority with regard to ship loans to Moraites and Pensec, but the loans were to be kept within the monetary limitations and collateral requirements set by the board. Moraites, a maritime attorney practicing in New York, was relied upon by the board to provide the necessary expertise and documentation for Midland's portfolio of ship loans. Pensec was given sole authority to accept ship loans for Midland and was the sole bank officer with responsibility for supervision of the ship loans. Due to the specialized nature of this type of lending, Moraites, by virtue of his expertise and Pensec, by virtue of his delegated authority, had virtually absolute control2 of Midland's ship loan portfolio.

By mid-1966 the ship loans of one George T. Bacalakis were in difficulty. These loans had been procured by Moraites who had an interest in the borrowing ships. In October of 1966, Moraites began urging one John T. W. McTaggert to take over the operation of the Bacalakis vessels, McTaggert, together with one John P. Katsoulakos, owned a ship brokerage firm, K&M Shipbrokers, Ltd. ("K&M"). This company was in the business of operating and managing vessels on behalf of ship owners, although some of the ships were owned by Katsoulakos.

McTaggert testified that as the result of Moraites' continued entreaties, he and Katsoulakos went to New York to consider Moraites' proposal. As Moraites presented it, he had a personal interest in the ships that had been financed for Bacalakis and was asking K&M to take them over and run them for the benefit of the owners and financiers. Moraites said that the Israel Discount Bank was about to foreclose its mortgages on these vessels and that Midland's outstanding debt, which was unsecured and without any collateral, amounted to $375,000. McTaggert testified that K&M agreed to attempt to salvage the operation of the vessels. K&M agreed to give second mortgages to secure the previously unsecured $375,000.

K&M determined that they would require $150,000 in working capital to undertake the project. Moraites told McTaggert that "he had taken care to see that the $150,000 was forthcoming and he would make arrangements with Mr. Pensec." The $150,000 was generated by a letter of credit in that amount from Midland Bank. No collateral was deposited with Midland to secure the letter of credit.

K&M then took over the operation of the Bacalakis vessels. It soon became apparent that the initial $150,000 advancement of working capital was insufficient. When McTaggert informed Moraites of this fact, Moraites replied that he, Moraites, had arranged with Pensec that Midland Bank would provide K&M with whatever funds were necessary to keep the Bacalakis ships operating.3

McTaggert described the manner in which additional monies over and above the initial $150,000 were provided to K&M. He testified that as funds were forwarded, K&M would execute blank promissory notes. The blanks were to be filled in by Moraites and Pensec as to the amount of the loan and the name of the company against which the loan would be booked. These advances to K&M were originally booked as loans against K&M's own corporations because the Bacalakis companies already had outstanding balances which were too high. Moraites had assured McTaggert, however, that K&M would have no obligation to repay these monies. The entire K&M expenditure in connection with the operation to salvage the Bacalakis vessels amounted to approximately $1,700,000, of which about $1,000,000 was spent in 1967. The money was obtained from Midland Bank in the form of loans made with no collateral or security of any kind.

Appellant Pensec's involvement in the attempt to prevent the collapse and foreclosure on the Bacalakis ships is based upon both circumstantial and direct evidence. In January of 1968, Midland was being audited in connection with a proposed merger. The ship loan portfolio was excepted to because the files revealed no collateral as well as documentary inadequacies. As a result of this threatened impediment to the merger, an associate of the bank's counsel traveled to the K&M offices in London to obtain mortgages and to correct the documentary inadequacies. K&M provided additional sham notes and mortgages on the promise that all would be returned. McTaggert characterized these new notes and mortgages as "paper work" done so that the ship loans would pass the merger examination. A Midland director testified that Pensec continually assured the board that the ship loans were in good order. The bank's internal auditor testified that Pensec had, when questioned about the ship loans, replied that they were adequately collateralized and that he, Pensec, had met the borrowers and knew them personally.

Midland's ship loan portfolio was criticized by the New Jersey Department of Banking and Insurance ("the Department") as early as October 26, 1966, when its yearly examination found the concentration of ship loans to be excessive. In 1967, a Department examiner reviewed the ship loan files and determined them to be basically unsecured although carried on Midland's books as collateralized. When the examiner confronted Pensec with these findings, appellant stated that the loans were collateralized but was unable to locate the proper documents. Ultimately some documentation was obtained from Moraites' offices. When the examiner's report reached the Department, the chief examiner wrote to Midland on July 19, 1967, concerning the ship loans, stating that their concentration threatened Midland's very existence and that the situation had to be rectified by negotiating the orderly reduction of the loans until Midland's involvement therein had been entirely eliminated.4 This letter was reviewed by Pensec for Midland's executive committee; however, the language indicating the threat to Midland's "very existence" was omitted. Pensec answered the Department on August 16, 1967, stating that the letter had been reviewed in detail by the executive committee and promising that no additional ship loans would be made, that an orderly reduction would begin, and that loans in excess of statutory requirements had been corrected. Actually, these representations were all incorrect. The Department's letter had not been reviewed in detail, additional ship loans were made, monies received by Midland on outstanding ship loans were not used to reduce the loans but were credited to a checking account for use by K&M,5 and the ship loans were still in excess of the statutory requirements. Another letter from appellant to the Department, dated October 18, 1967, purported to report the loan balances on Midland's ship loans as of that date. The...

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