United States v. West

• Decision Date: 21 January 1976
• Docket Number: Crim. No. 75-0-87.
• Citation: 407 F. Supp. 1148
• Parties: UNITED STATES of America, Plaintiff, v. Frank R. WEST and American Beef Packers, Inc., Defendants.
• Court: U.S. District Court — District of Nebraska

407 F. Supp. 1148

UNITED STATES of America, Plaintiff, v. Frank R. WEST and American Beef Packers, Inc., Defendants.

Crim. No. 75-0-87.

United States District Court, D. Nebraska.

January 21, 1976.

Daniel E. Wherry, U. S. Atty., District of Neb., Michael L. Schleich, Asst. U. S. Atty., District of Neb., for plaintiff.

Arthur D. O'Leary, Omaha, Neb., for defendant, Frank R. West.

Lyle E. Strom, Omaha, Neb., for defendant, American Beef Packers.

MEMORANDUM

DENNEY, District Judge.

This matter comes before the Court for decision subsequent to trial and the submission by the parties of final argument in written form.

American Beef Packers was once the second largest packinghouse and the 218th largest corporation in America. In the fiscal year ending July, 1974, it had sales of $896,904,000, net earnings of $4,861,000 ($2.50/share), over 3000 employees, and slaughtered 1,483,100 cattle and 564,000 hogs. Six months later, it filed for Chapter XI bankruptcy.

On August 8, 1975, American Beef Packers, Inc., Frank R. West, Robert E. Lee, and Beefland International, Inc. were named in a 105 count indictment alleging violations of 18 U.S.C. §§ 1341, 1343, 2314, 371 and 2. The gist of the indictment is that the defendants devised and executed a scheme or artifice to defraud cattle feeders and creditors of money or property valued in excess of 20 million dollars. At the close of the plaintiff's case, the Court granted the motion of Robert E. Lee to dismiss on the grounds of insufficient evidence. Beefland International was dismissed as a defendant at the close of all the evidence, on the grounds that it was a wholly owned subsidiary of American Beef Packers and that, as such, its inclusion was duplicitous. As against Frank R. West, the Court dismissed all counts except those Counts 75 through 82, inclusive; 84 through 97, inclusive; and 99 through 101, inclusive relating to the diversion of funds from the General Electric Credit Corporation hereinafter GECC; likewise, as against American Beef Packers hereinafter ABP, the Court dismissed all counts except Counts 41 through 47, inclusive; 71 through 82, inclusive; 84 through 97, inclusive; and 99 through 101, inclusive, relating to the diversion of funds from GECC and the purchase of cattle from Chapman Cattle Company. Although not required to do so, the Court will discuss the facts and circumstances underlying all of the counts as charged in the indictment.

In accordance with F.R.Cr.P. 23(c), the Court makes the following findings of fact and conclusions of law.

ABP began in 1963, when the defendant, Frank R. West, and others, purchased Western Iowa Pork. Prior to that time, Mr. West had been engaged exclusively in the order buying business. Western Iowa Pork, a hog packinghouse located in Harlan, Iowa, was not initially successful and Mr. West loaned the company money and took over its day to day operations until it became a going concern. American Beef Packers then opened a plant in Oakland, Iowa, in late 1966, and again Mr. West took over the day to day operations. A plant was opened in Omaha, Nebraska, in 1968, and, in 1972, Beefland International hereinafter BI was acquired.

GECC had been financing BI while James Talcott had been providing credit to ABP. However, when BI was acquired, ABP switched to GECC as its prime source of credit, and thereafter both BI and ABP credit lines were identical, consisting of an accounts receivable financing arrangement. This type of financing was necessary, due to the high sales volume and the fact that the practice in the industry was that cattle feeders were paid by check immediately upon delivery of the cattle, while purchasers of slaughtered carcasses typically did not pay the packinghouse until two weeks after delivery. Thus, almost three weeks would elapse from when ABP purchased a head of cattle until that head was paid for by the customer (e. g., a supermarket or wholesaler).

These credit agreements, signed on June 28, 1972 Exhibits 203A and 204A, extended a 41 million dollar revolving line of credit secured by the accounts receivable of ABP and BI, and a 13 million dollar long term loan. The actual amount of the revolving loan varied, but was not to exceed an amount equal to 90% of "eligible receivables" plus 60% of inventory.

Eligible receivables were computed daily by taking receivables less than 30 days old, and making various adjustments based on the amounts received at various lockboxes that day, and the sales for that day. In the event that the updated figures indicated an increase in collateral, then GECC declared the amount by which 90% of eligible receivables plus 60% of inventory exceeded the loan balance, as "available." ABP could receive money under their loan, on a daily basis, only to the extent such moneys were "available."

To insure collection, the loan agreements provided for "lockboxes", which were post office boxes in various cities. A bank in each city was authorized by ABP to pick up customer checks coming into the lockboxes and to deposit the checks in a GECC account in the bank.

When a customer's check was received at a lockbox, it was credited as a payment on ABP's loan, and simultaneously a like amount was taken off the receivables, thus reducing the collateral. Each morning, an employee of ABP (usually Lowell Smith) would call an employee of GECC (usually Louis Kovanda). These men would exchange figures on the sales of the preceding day and the lockbox receipts. In addition, Lowell Smith would compute the amounts needed at ABP's bank to cover checks written by ABP on those banks. ABP and GECC usually agreed on the amount that ABP was entitled to under the loan agreement, and by 3:00 P.M. Omaha time GECC would have wire transferred the funds to ABP's bank.

In the fall of 1974, ABP established checking accounts at banks distant from the livestock feeding areas of the midwest. This was done to take full advantage of mail delays that would postpone presentment of ABP checks, thereby giving ABP a few days before it was necessary to borrow money from GECC to cover the checks. The operation of these checking accounts is more fully explained subsequently in this Memorandum.

On several occasions, from December, 1973, through June, 1974, ABP diverted incoming checks that would normally have been deposited in lockbox accounts. This was accomplished by Mr. Lowell Smith or Herbert Schrader of ABP, who would call various customers of ABP and request that they send their checks to ABP offices instead of to the lockboxes. There were also a few customers who sent their checks to ABP out of habit or inadvertence. For these few customers, GECC and ABP established a lockbox account in the Omaha National Bank. Under the terms of the loan agreement and the common understanding of the parties and their practices, all receivables were to be deposited into a lockbox account. See ¶ 8, Exhibit B, as amended, of Exhibit 203A. Thus, a diversion was accomplished by taking checks coming into ABP and depositing them into the Northwestern National Bank — using the money for 7 to 10 days and then wire transferring the money into the ONB lockbox account. In early 1974, the amount of the diversion would approach 3 million dollars but before June, 1974, ABP would always pay back the diversion (by wire transfer to the ONB lockbox account) before the end of the month.

Prior to June, 1974, Mr. Taphorn, then the financial vice-president of ABP, discussed this practice with Frank West on numerous occasions. Mr. Taphorn proposed various methods of increasing their operating cash by selling liquid assets (e. g. cattle on feed) and usually Mr. West would agree, and the diversion would be cleaned up temporarily.

Mr. Taphorn left ABP in June, 1974, because the company was in need of ever increasing amounts of cash, and he felt that as he was unable to raise the necessary funds, he should step aside. Tom Clark, formerly employed as a CPA by Arthur Anderson, Inc., was hired to replace Mr. Taphorn. Mr. Clark was no more successful than Mr. Taphorn in raising funds. ABP was in the process of constructing a large plant in Dumas, Texas. When construction began in the fall of 1973 on the Dumas plant, its estimated cost was 11 million dollars and ABP planned to finance it with 8.5 million dollars in long term money from GECC and the Economic Development Association, while the remainder was to be paid out of working capital. Dumas, however, began to cost more than anticipated. In June, 1974, expenditures on Dumas had escalated to 15 million dollars, of which 7 million dollars then had to be financed out of working capital. The costs continued to rise to a figure approaching 20 million dollars, yet the plant was still not completed by January, 1975.

Exhibit 411, a summary prepared by Eugene Peuterbaugh of the Packers and Stockyards Administration, demonstrates the extent of the diversion. In June, 1974, nine checks totalling $2,142,227 were diverted and used for an average of 34 days. July saw eleven checks totalling $1,316,388 being diverted for an average of 22 days. In August, 1974, twelve checks totalling $5,022,361 were diverted and used for an average of 20 days. As accounts more than 30 days old were dropped from the list of eligible receivables, there was no advantage to ABP in retaining a diverted check past the time the account was 30 days old. This fact is reflected in the figures for the subsequent months, showing an increased sophistication in the diversion. September saw eleven checks totalling $3,838,614 being diverted for an average of nine days. In October, 1974, the size and frequency of the diversion increased to such an extent that oftentimes groups of checks were deposited in the Northwest National Bank at the same time. Bookkeeping became a nightmare. Gail Keenan, an ABP employee, testified that she would prepare Exhibit 402 deposit slips in duplicate and would make a copy of all diverted checks. These...