United States v. Nowak

• Decision Date: 05 October 1971
• Docket Number: No. 18338.,18338.
• Citation: 448 F.2d 134
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Joseph W. NOWAK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

448 F.2d 134 (1971)

UNITED STATES of America, Plaintiff-Appellee, v. Joseph W. NOWAK, Defendant-Appellant.

No. 18338.

United States Court of Appeals, Seventh Circuit.

July 26, 1971.

Rehearing Denied October 5, 1971.

Anna R. Lavin, Chicago, Ill., for defendant-appellant.

Wm. J. Bauer, U. S. Atty., Chicago, Ill., Edward Fenig, Crim. Div., Dept. of Justice, Will Wilson, Asst. Atty. Gen., Washington, D. C., for plaintiff-appellee.

Before SWYGERT, Chief Judge, and FAIRCHILD and STEVENS, Circuit Judges.

SWYGERT, Chief Judge.

Defendant-appellant, Joseph W. Nowak, appeals his conviction of having participated in a conspiracy to violate four sections of the criminal code (18 U.S.C. §§ 657, 1001, 1006, 1008) in violation of 18 U.S.C. § 371. After having been found guilty by a jury, he was sentenced to three years imprisonment.

Since the sufficiency of the evidence is not questioned, a brief résumé of the facts will suffice.¹ In 1960 Vernon Sherman as an entrepreneur wished to develop a tract of land near Chicago into homesites with an adjoining golf course, swimming pool and clubhouse to be known as Riverwoods Country Club. To obtain financing he contacted John Perisich, a mortgage broker, who for a fee agreed to help. Perisich, in turn, contacted Service Savings and Loan Association, a federally insured state-chartered institution in Summit, Illinois. Service agreed to finance the Riverwoods project on the condition that Perisich would arrange with money brokers (persons who for a fee engage in the business of directing deposits of money into a financial institution) to deposit sufficient money in Service for the Riverwoods loan.

Defendant Nowak was Service's attorney and his co-defendant, William Szarabajka, was its president.² During 1961 Nowak worked out the plans for the Riverwoods loan, including the acquisition of the deposits brokered by Perisich, so that Service would have the funds to finance a $3,100,000 loan. One of the reasons for making the loan was to enable Service, from its retention of prepaid interest and other charges, to pay its August 31, 1961 semi-annual dividend to depositors.

The loan was completed in June 1961 on an appraisal of $8,000,000 placed on the contemplated project by one Mulhern who was told by Nowak to prepare the appraisal on data supplied by Sherman. Sherman refused to submit any information concerning his personal financial responsibility. The actual value of the project approximated $2,500,000. Sherman expended nearly two million dollars of the mortgage money before any construction was started. These expenditures included the payment of an interim mortgage of $1,200,000 which codefendant Morris had arranged and $186,000 to Perisich for obtaining the loan and for payments to money brokers for depositing funds with Service. Sherman also gave Perisich $93,000 in cash from the proceeds of the loan. Perisich in turn handed Nowak approximately $72,000. Because of these and other payments Sherman was left without sufficient funds to complete construction.

Although no payments were made to retire the loan, Service in January 1963 increased the Riverwoods indebtedness by $700,000. This was accomplished by the granting of a new loan of $3,800,000 and the canceling of the original loan. The new mortgage papers were prepared by Nowak. To obtain money for the increased amount, Sherman arranged and paid for brokered deposits to be placed with Service. Edward Szarabajka, Service's vice-president, handled the funds received through the money brokers. In so doing he directed his secretary not to make notations on the depositors' account cards as to the source of the funds, but instead to make secret monthly lists of brokers who sent in deposit accounts. In March 1964, when regulatory examiners were at Service he repeated his instructions to her to keep the existence of the lists secret, pursuant to directions by both Nowak and president Szarabajka.

By 1961 the Federal Savings and Loan Insurance Corporation (FSLIC) considered the use of brokered deposits by savings and loan associations to make loans as against its interest, as such deposits are expensive to acquire, volatile and apt to affect the liquidity of the associations. At that time the Federal Home Loan Bank Board issued a regulation which required insured institutions to report brokered deposits and limited the volume of such deposits to a percentage of an association's total capital.

The Board, during 1961-1963, directed various inquiries to Service. Nowak as attorney for Service prepared the answers which were then signed by officers of the association. The answers were false in that they recited that Service had no knowledge of commissions being paid to brokers for deposits, that no money broker had been used to obtain funds for the Riverwoods loan, and that Sherman's financial statement had been seen by the defendant in 1961 and found to be satisfactory.

I

Defendant contends that 18 U.S. C. §§ 657, 1006, 1008 are unconstitutional when applied to state-chartered institutions insured by FSLIC. He argues that since "the original constitutional basis for legislation controlling FSLIC * * * (the appropriation of Treasury moneys) no longer exists," the necessary constitutional nexus between state-chartered insured institutions and valid federal criminal legislation touching such institutions is lacking.

An examination of the origin and purposes of FSLIC demonstrates that defendant's contention is untenable. In 1934 as part of the National Housing Act, FSLIC was created as a vehicle to insure the safety of private investment in savings and loan associations in order to strengthen the savings and loan industry and thereby promote the financing of homes and the encouragement of savings. Congress directed the Home Owner's Loan Corporation to subscribe for all of FSLIC's $100,000,000 of capital stock. In 1950 Congress determined that FSLIC's resources had reached a point where some plan for the retirement of the initial $100,000,000 capital contribution might safely be implemented. Accordingly, Congress added subsections (h) and (i) to 12 U.S.C. § 1725; these provided for the gradual retirement of FSLIC's capital stock and authorized FSLIC to borrow up to $750,000,000 from the United States Treasury. By 1958 FSLIC had retired its entire capital stock. At its creation, FSLIC was designated an instrumentality of the United States. 12 U.S.C. § 1725(c), and it has since been designated an "agency of the United States," 12 U.S.C. § 1730(k) (1). See also, 12 U.S. C. § 1437(b). FSLIC is under the direction of and is operated by the Federal Home Loan Bank Board which is also an agency of the United States, 12 U.S.C. § 1437(b).

Defendant admits, as he must, that the creation of FSLIC was a valid exercise of congressional power to appropriate funds and to legislate in aid of the "general welfare." U.S.Const. art. I, § 8, cl. 1. Cf. Helvering v. Davis, 301 U. S. 619, 640, 57 S.Ct. 904, 81 L.Ed. 1307 (1937); First Federal Savings & Loan Ass'n v. Loomis, 97 F.2d 831, 839 (7th Cir. 1938), petition for cert. dismissed, Martin v. First Federal Savings & Loan Ass'n, 305 U.S. 666, 59 S.Ct. 363, 83 L. Ed. 432 (1939); Langer v. United States, 76 F.2d 817, 825 (8th Cir. 1935). Defendant contends, however, that because the United States no longer has a financial stake in FSLIC, it has become "a well organized private industry, supported and owned by the organizations it insures." This argument has no merit.

That FSLIC has returned all of the capital contributed by the United States and has no outstanding stock does not mean that the United States no longer "owns" FSLIC.³ Congress may use any appropriate vehicle to promote constitutionally permissible ends. M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 422, 4 L.Ed. 579 (1819). If it chooses to make use of a "corporation," Congress is not limited by traditional notions of corporate powers and organization but may mold its vehicle in any way which appears useful to the accomplishment of the legislative purpose. Thus Congress need not capitalize corporate instrumentalities of the United States in any rigidly prescribed manner. Congress need not provide for formal evidence of ownership but, having created the corporate instrumentality, may designate the United States "owner" and continue to regulate and control the instrumentality so long as it is acting in furtherance of some valid constitutional purpose.⁴

Congress has created a complex structure of interrelated instrumentalities to regulate and promote the banking industry. Its power to create this system has been consistently upheld;⁵ and "the power to inaugurate such systems and to create such institutions carries with it inevitably the power to preserve and protect them." Weir v. United States, 92 F.2d 634, 636 (7th Cir.), cert. denied, 302 U.S. 761, 58 S.Ct. 368, 82 L.Ed. 590 (1937). See also Doherty v. United States, 94 F.2d 495, 498 (8th Cir.), cert. denied, 303 U.S. 658, 58 S.Ct. 763, 82 L. Ed. 1117 (1938). Nothing in the Constitution suggests that Congress must make continuing appropriations to have this power. Congress may use necessary and proper means of promoting the general welfare, and if money is needed for that purpose, Congress may use public funds. But it is wrong to suggest that if certain steps in aid of the public welfare may be taken without the use of such funds, Congress is powerless to take those steps.

Finally, we note that Congress has authorized the Secretary of the Treasury to employ FSLIC as a depositary of public money and a fiscal agent of the United States, 12 U.S.C. § 1725(d). That Congress has the power to create corporations to act as fiscal agents of the United States was squarely affirmed in Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577 (1921).⁶ That case established that the Secretary of the Treasury need never have exercised his power to designate the corporation a...