Christmas was not so good for James Sandlin. On December 22, 2009, the Court of Appeals for the Fifth Circuit affirmed his bank fraud conviction in what seems to me a highly unusual case. U.S. v. Sandlin, No. 08-41277 (5th Cir.) (Op. filed December 22, 2009).

Sandlin was a developer who applied for a loan to a bank in Sherman, Texas. In his loan packet, he acknowledged having more debt than he disclosed, but failed to list the additional debt. In fact, Sandlin had a near $1 million undisclosed loan outstanding on a piece of property he pledged as collateral to the bank. But wait, at trial, bank representatives testified the bank suffered no loss, they considered their loan to be fully collateralized (despite the undisclosed $1 million debt); in their view Sandlin was not required to list the $1 million debt; and besides, no one in the bank ever reviewed the alleged "false" document in question. Nonetheless, the jury convicted Sandlin of two counts of fraud.

In affirming the conviction, the Fifth Circuit noted that it was Sandlin's intent, not that of the bank that mattered, so even if the bank was not concerned with the omission, Sandlin still knew the application was false and that was enough to prove fraud. Sandlin's trial defense appears from the opinion to have been that he had "forgotten" about the $1 million debt at the time of application. That defense failed when the government proved that Sandlin was making monthly interest payments on this loan and had paid nearly $100,000 in interest on that loan the previous year.

It seems to me that a better defense would have been to concentrate more on the bank's conduct and less on Sandlin's faulty memory. Everyone is aware of the "winks and nods" that sometimes accompany the lending process. Sandlin could have defended on what the bankers told him and what he understood their expectations to be. That testimony would have mirrored the bankers' own testimony that they did not care about the extra debt. There simply can be no fraud without deception or an intent to deceive by the borrower.

The bottom line here is that Sandlin's "I forgot" defense missed the mark. Defending these cases requires an understanding of the system, expectations of the players (stated and unstated), and the ability to exploit that information to the client's advantage.

Until next time,

Todd

Please find a link below to the executive summary of the Inspector General's report on the SEC's alleged failure to discover the Madoff Ponzi scheme earlier than it did. The report discusses but quickly dismisses the romantic relationship between SEC Assistant Director Eric Swanson and Bernard Madoff's niece, Shana Madoff, as a factor in the misfeasance, but does fault, appropriately, the SEC for failing to recognize multiple, obvious signs of the Ponzi scheme.  It also sadly notes that even when the SEC decided to take action, it failed to do so for no apparent reason.  One has to wonder how many millions of dollars and hundreds of victims would have been spared if the process had worked like it is supposed to.  The ultimate irony is that Madoff used the SEC's failures to take any action against him as marketing materials to convince equivocal investors of the safety of investing with him.

To me, this report proves yet again the potential fallibility of government and institutional investigations. We will see more reports like this as mortgage and bank fraud cases wind through the system and institutional practices of the lenders which avoid knowledge of obvious risk are exposed.  I recently gave a lecture on this at the annual meeting of the National Association of Criminal Defense Lawyers in Boston (if anyone is interested in seeing any of the materials, let me know.)  Bottom line, next time there is a claim of institutional regularity or that a presumption of governmental competence should apply to a matter, keep in mind the names Madoff, Ameriquest, and Aisenberg.

Link: Executive Summary.pdf

Note that the initial review of eligibility will be performed by the IRS-Criminal Investigation Division (those are the IRS special agents with guns and arrest powers), so this should be approached with care and only by those with knowledge and experience in these areas.

On March 6, 2008, the U. S. Court of Appeals for the Eleventh Circuit unanimously affirmed the bribery and mail fraud convictions of HCA founder Richard Scrushy. In the same opinion, the court reversed the mail fraud convictions of co-defendant and former Alabama Governor Don Siegelman, although Siegelman's bribery and obstruction of justice convictions were affirmed. Siegelman's case was remanded for re-sentencing where the sentencing court will reconsider his seven-year sentence. Scrushy's sentence of more than six years imprisonment stands. U.S. v. Siegelman and Scrushy (No. 07-13163, Op. filed March 6, 2009).

According to the opinion, the bribery count arose from an agreement between Seigelman and Scrushy to appoint Scrushy to the Alabama Certificate of Need (CON) Review Board in exchange for $500,000. The CON Board is responsible for issuing certificates of healthcare need which are required before certain new healthcare facilities can do business in Alabama. Apparently, the former governor had personally guaranteed a large debt incurred in connection with an initiative to convince Alabama voters to approve a statewide lottery to fund educational reform. The opinion describes how the $500,000 was used to offset Siegelman's obligation in exchange for Scrushy's appointment as vice chairman of the CON Board.

Permissible limits on payments to political candidates have been the subject of more than one U.S. Supreme Court case. In a political system dependent upon private contributions for campaigns for public office, the line has been drawn at contributions made for an explicit promise by the official to perform or not perform an official act in exchange for the contribution. Siegelman and Scrushy argued that the law requires not only an "explicit" agreement, but also that the agreement to do or refrain from doing an official act be "express". Recognizing that requiring proof of an express agreement would allow bribers to escape criminal liability through the use of "winks and nods", the Eleventh Circuit refused to read this requirement into the statute.

The court did reverse Siegelman's mail fraud convictions. Those counts charged that Scrushy and Siegelman agreed that Scrushy would use his position on the CON Board to defraud Alabama of his honest services. Concluding that the government failed to prove this was part of Siegelman's agreement, the court vacated those convictions.

You may recall the allegations of partisanship that accompanied this indictment of this former Democratic governor by a Republican appointed U.S. Attorney. In classic strategy, the government offered a deal to a former Siegelman aide facing 10 years in prison on an unrelated extortion case in exchange for his pivotal testimony against the former governor. Allegations have arisen that the prosecution improperly suppressed key impeaching facts about this witness which would have made a difference in the jury's consideration of his credibility. Many considered this prosecution unfair and a group of 52 former state attorney generals asked Congress to investigate whether it was pursued because of politics and not merit. Nonetheless, a jury, district court and three judge appellate panel agreed that a half million dollars was paid in exchange for an explicit agreement to appoint a powerful health care official to a powerful health care board.