USA v. Faulkenberry

Decision Date28 July 2010
Docket NumberNos. 08-4233, 08-4404.,s. 08-4233, 08-4404.
Citation614 F.3d 573
PartiesUNITED STATES of America, Plaintiff-Appellee, v. Roger FAULKENBERRY, Defendant-Appellant.
CourtU.S. Court of Appeals — Sixth Circuit

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ARGUED: Martin G. Weinberg, Law Offices, Boston, Massachusetts, for Appellant. Nina Goodman, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF: Martin G. Weinberg, Law Offices, Boston, Massachusetts, for Appellant. Nina Goodman, United States Department of Justice, Washington, D.C., for Appellee.

Before: SUTTON, KETHLEDGE, and WHITE, Circuit Judges.

OPINION

KETHLEDGE, Circuit Judge.

What is not seriously disputed in this appeal is that National Century Financial Enterprises (NCFE) defrauded its investors of more than $2.4 billion. What is disputed is whether Roger Faulkenberry participated in the fraud. The jury in this case concluded that he did, convicting him of securities fraud, wire fraud, money laundering, and conspiracies to commit all of those crimes. Faulkenberry now appeals, primarily challenging the sufficiency of the evidence supporting each conviction. We conclude there was ample evidence to vindicate the jury's finding of guilt as to the fraud counts. But money laundering is a different animal than fraud; and we conclude that the government did not prove money laundering here. We therefore affirm Faulkenberry's fraud convictions, reverse the money-laundering ones, and remand the case for resentencing.

I.
A.

NCFE's business was to purchase, at a discount, the accounts-receivable of healthcare providers. The transactions were supposed to proceed as follows: First, NCFE would pay the provider approximately 80% of the receivable amount up front, in return for ownership of the receivable. NCFE would then put approximately 17% of the receivable amount into a “reserve account” in an NCFE subsidiary's name, and keep the remaining 3% for itself. The purchases thereby afforded providers immediate cash flow; and in theory, they generated profits for NCFE in the amount of the discount and certain fees it charged the providers.

Of course, NCFE itself needed cash to make the purchases; and to that end, it sold bonds to investors, mostly (if not entirely) institutional ones. NCFE made very specific representations to investors in connection with those sales. First, it told them that invested funds would be used only to purchase “eligible receivables.” Those receivables, in turn, would serve as collateral for the amounts that NCFE itself owed its bondholders. Thus, for every dollar of investor money that NCFE wired to providers, the investors would gain a dollar's collateral-in the form of an eligible receivable-to secure NCFE's own obligation to repay them. Indeed the investors would gain more than that: Since the entire amount of a purchased receivable would serve as collateral, but (as discussed above) NCFE would wire the provider less than that amount, the investors would be overcollateralized to the extent of the difference. NCFE told investors as much expressly.

Second, NCFE told investors that it would maintain “reserve accounts” equal to 17% of each provider's “outstanding Purchased Receivables.” That meant investors would be doubly protected: As discussed above, NCFE's obligation to repay them would be collateralized by eligible receivables; and to the extent any receivables went unpaid, NCFE could then withdraw the unpaid amount from a reserve account, thereby making itself, and ultimately the investors, whole.

Third, NCFE defined eligible receivables to include only ones that were tied to services performed on a specific patient on a specific date, and that were less than 180 days old as measured by the date on which the patient was served. None of the receivables serving as investor collateral, therefore, would be stale. And fourth, NCFE promised to honor certain “concentration limits,” which diversified investor risk by limiting the percentage of investor funds that NCFE could allocate to a single provider. As a result of these representations, NCFE raised billions of dollars from investors.

The record before us makes unmistakably clear that NCFE's representations were false. NCFE executives lied to investors in sales presentations; they lied to them in the governing documents for bond sales; and they lied to them in monthly investor reports that showed NCFE in full compliance with the obligations recited above. This practice of deception was continuous from approximately 1995 to October 2002, when NCFE ceased operations.

The deception centered on the practice of “advancing.” Contrary to what it told investors, NCFE routinely advanced funds to healthcare providers without obtaining any receivables, much less eligible ones, in return. NCFE apparently just fronted these monies-investor monies-with the hope that someday the provider would pay them back. Indeed, some providers were already so buried in debt that even the hope must have been absent. Moreover, the advances were large and focused on only a handful of providers, which meant that NCFE blew past its concentration limits as well.

The advances' effect, over time, was to render NCFE's investors increasingly undercollateralized. For example, a memorandum dated August 7, 2002-on which Faulkenberry was the only cc-states that California Psychiatric Management Services, Inc. owed NCFE nearly $50 million, which was backed by only about $2 million in receivables, leaving almost $48 million uncollateralized. The collateral shortfall for Consolidated Health Corporation, Inc., was more than $120 million; for Doctors Community Healthcare Corporation, more than $486 million; for Homecare Concepts of America, Inc., more than $614 million; for MED Diversified, Inc., almost $136 million; for Medshares, Inc., $129 million; for Millenium Health Group, Inc., $136 million; for Pain Net, Inc., more than $71 million; for PhyAmerica, L.L.C., almost $115 million; and for Scott Medical Group-one of whose transactions looms large here-more than $132 million. These providers did not themselves, of course, make any representations to NCFE's investors. But measured by what NCFE represented to investors, this was fraud on a massive scale.

The fraud was compounded by other protections that NCFE claimed to provide investors. The bonds' governing documents required that investor monies be deposited in accounts in the names of two of NCFE's subsidiaries, NPF VI and NPF XII. To monitor those accounts, the documents created Trustees-JP Morgan Chase (for NPF VI) and Bank One (for NPF XII)-both of which the SEC later fined for their derelictions in that role. Per the bonds' master indentures, the Trustees could wire funds to providers only to the extent that NCFE documented that it was obtaining eligible receivables in return. But NCFE evaded this limitation by submitting a phony Receivables Purchase Report to the Trustees for every advance.

The governing documents also required NCFE to submit, to the investors and Trustees, monthly reports demonstrating its compliance with all the obligations described above. To that end, NCFE had a “Director of Compliance,” Sherry Gibson, who testified at trial that every such report, from 1995 until NCFE's collapse in 2002, was falsified: “The data would be manipulated in any way necessary in order to make compliance on the report.” She further testified: “I added receivables to the data, I changed the aging categories, I added payor information, I manipulated the reserve accounts.”

One document, Government Exhibit VII-21, illustrates the falsification in brazen detail. That document sets forth, in two columns for easy comparison, the “reported” and “actual” data for NPF VI's August 2002 investor report. In the reported column, most of the line entries relating to NPF VI's compliance with the obligations described above are falsified. Marginal notations along the actual column explain how and why: The value of outstanding receivables “was overstated by $210,720,030” to match up with the amount owed by providers; in the “Concentration Limits” section, the amounts owed by some providers were “understated to comply” with those limits, the amount for others was “overstated to compensate for ineligible receivables [,] and [p]rovider names are misreported as well”; and in the “Receivables Aging” section, literally every line entry was falsified ([a]ll buckets misreported”), in part to report roughly $86 million of stale receivables as being ones that were less than 180 days old.

NCFE also misrepresented the amount of funds in its reserve accounts, albeit in a different way. Those accounts were held, respectively, in the name of NPF VI and XII, and subject to Trustee oversight. Advancing left NCFE without adequate means to fund the accounts, so by 2000 their balances were well short of the requisite 17% of “outstanding Purchased Receivables.” Meanwhile, the Trustee for each NPF account “tested” the sufficiency of its balance on a designated day of each month. NCFE arranged for the NPF VI and XII testing to be conducted on different days, however, and then shifted funds between the accounts as necessary to make each account appear to have sufficient funds on its testing day. That shifting-first to one NPF entity, and then back to the other-occurred every month from approximately 2000 onward. The amounts shifted were large: NCFE would routinely shift more than $100 million from one NPF reserve account to the other, and then shift the money back a few days later. By 2002, NCFE had to transfer all of its reserve funds from one account to the other to hide the shortages.

Finally, on September 30, 2002, a Trustee bank refused to shift funds from one NPF account to the other. That refusal triggered a cascade of events that revealed the full extent of NCFE's fraud to its investors. NCFE declared...

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