United States v. Cochran ( 1997 )

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
MAR 25 1997
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
vs. No. 96-6305
ROBERT M. COCHRAN,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA.)
(D.C. No. CR 95-128-T)
B.J. Rothbaum, Jr. (Drew Neville and Russell Cook with him on the brief), Linn &
Neville, P.C., Oklahoma City, Oklahoma for Defendant-Appellant.
Susan Dickerson Cox, Assistant U.S. Attorney (Mary C. Spearing, Acting U.S. Attorney,
Mary M. Smith and Michael C. James, Assistant U.S. Attorneys, with her on the brief),
Oklahoma City, Oklahoma, for Plaintiff-Appellee.
Richard H. Walker, General Counsel, Eric Summergard, Principal Assistant General
Counsel, Adam C. Pritchard, Attorney, and Paul Gonson, Solicitor, Securities and
Exchange Commission, Washington, D.C. for Amicus Curiae, The Securities and
Exchange Commission.
Before BALDOCK, KELLY and LUCERO, Circuit Judges.
KELLY, Circuit Judge.
Defendant-appellant Robert M. Cochran appeals from his conviction on five
counts of wire fraud, 18 U.S.C. §§ 2, 1343, 1346, one count of interstate transportation of
stolen property, 18 U.S.C. §§ 2, 2314, and two counts of money laundering, 18 U.S.C. §§
1956, 1957. The jury acquitted on seven counts of wire fraud and six counts of money
laundering and also acquitted Mr. Cochran’s codefendant. Mr. Cochran was sentenced
to 87 months imprisonment, ordered to provide restitution of up to $489,241.09, to pay a
fine of $50,000 and $400 in special assessments and, following release, to serve three
years on probation. We stayed his reporting date and expedited his appeal.1 Our
jurisdiction arises under 28 U.S.C. § 1291. We reverse.
Background
This is a case about greed, and not only that of Defendant. That said, greed and
criminal liability are not necessarily synonymous. Mr. Cochran was the head of the
Oklahoma City Municipal Bond Underwriting Department of Stifel, Nicolaus &
Company, Inc. (Stifel). Stifel participated in underwriting several municipal bond issues
and received compensation from both the issuers and various third-party financial
institutions. The pertinent transactions for our purposes include: (1) a 1992 Oklahoma
City Airport Trust transaction (OCAT transaction) where the government charged that
1
In light of our disposition, we deny Mr. Cochran’s motion for release
pending appeal as moot.
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Mr. Cochran and his acquitted codefendant Michael B. Garrett received the benefit a
$489,241.09 secret payment, and (2) a 1992 Sisters of St. Mary Healthcare System
transaction (SSM transaction) where the government charged that Mr. Cochran received
the benefit of a $100,000 secret payment.
A. OCAT Transaction
The OCAT transaction involved an issuance of almost $77 million in taxable
20-year revenue bonds by the Oklahoma City Airport Trust Authority to finance a
“transfer center” to be leased by the federal Bureau of Prisons. Stifel was named the co-
managing underwriter for this “BBB-rated” bond issue and received a portion of the 3.2
percent underwriting fee ($2.5 million). The bonds were somewhat unique and carried a
lower credit rating.
Because interest received by the bondholders was taxable, OCAT could earn an
unrestricted amount of interest on the bond proceeds. In addition to acting as underwriter
for the offering, Stifel also brokered a collateralized guaranteed investment contract
between OCAT and the Postipankki Bank, a Finnish bank with branches in the United
States. Such a contract allows the issuer to invest the bond proceeds at a fixed rate until
needed and earn a return in excess of most short-term investments.
As co-participating broker, Stifel contacted Pacific Matrix Financial Corporation, a
California money broker, to find a financial institution to provide the contract. Pacific
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Matrix selected Postipankki. Stifel received a fee of $529,241.09 from Postipankki, due
to the following series of events. On bid day, Postipankki bid 7.05 percent on the debt
service reserve funds and 4.2 percent on the construction and capitalized interest funds of
the bond issue. Stifel then instructed Pacific Matrix to deduct 50 and 25 basis points,
respectively, from the gross bid of Postipankki as the broker fee. Postipankki then
reduced its original bid from 7.05 to 7.0 percent on the debt service reserve fund and the
net bid figures presented to OCAT were 6.5 percent (7.0 percent less 50 basis points) and
3.95 percent (4.2 percent less 25 basis points), to account for the broker fees charged by
Stifel and Pacific Matrix. Gross or net, Postipankki submitted the highest bid. Tr. 1270.
Stifel and Pacific Matrix had agreed to split the broker fee 85%-15%, respectively, with
Stifel also recouping $40,000 (based on a previous transaction) from the Pacific Matrix
share. Postipankki paid Stifel through an affiliated company of Mr. Cochran, American
Investment Corporation (AIC), resulting in a net broker fee for Stifel of $489,241.09.
This was later transferred to Stifel’s account by Mr. Cochran.
OCAT was unaware of the fee (the difference between the gross and net bids) or
the fee split, although Mr. Cochran testified that his codefendant had informed him that
disclosure had been made. Mr. Luther Trent, OCAT director, testified that the Stifel fee
never came up but he presumed that Pacific Matrix would receive a fee, “just logic told
me the guy does it for something.” Tr. 1515. He also indicated that the return from the
guaranteed investment contract earned OCAT more than $1.5 million, and that the net
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rates received were excellent rates, over twice what OCAT was making on short term
Treasury securities. Tr. 1527.
B. SSM Transaction
The Sisters of Saint Mary Healthcare System is a Missouri not-for-profit
corporation that operates eighteen hospitals and three nursing homes. In an effort to
secure more favorable financing, the SSM transaction involved a refunding issuance of
more than $265 million of tax-exempt bonds, with Stifel as the co-senior managing
underwriter. Stifel recommended that SSM purchase a forward supply contract. A
forward supply contract is a financial instrument to invest bond refunding proceeds
during the period after securities in an escrow account are redeemed and before the date
when the funds must be distributed. It is beneficial because the maturity dates of the
investment securities in an escrow account often cannot be identical to the redemption
dates of the older bonds that are being refunded by the new bond issue. For example, $1
million of Treasury securities in an escrow account may mature on April 1, when the $1
million needed to repay principal on the older bonds is not due until April 15.
Stifel arranged for Sakura Global Capital (SGC) to provide the forward supply
contract. SGC had bid $400,000 to be paid to SSM. Unlike the OCAT transaction, the
SSM transaction was structured to generate tax-exempt interest for the bondholders which
meant that the yield on the investment of the refunding bond proceeds, including the
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forward supply contract, was restricted. Bond counsel, therefore, required Stifel to
certify that, other than the $400,000 specified in the forward supply agreements, no
payments would be made “by or on behalf of SGC to or for the benefit of SSMHC” and
“by or on behalf of SGC to any person.” Although Stifel and SGC certified that no such
payments were made, the latter representation was rendered incorrect when Mr. Cochran
sought and received a $100,000 fee from SGC subsequent to the certification. At trial,
Mr. Cochran contended that he had disclosed this fee to SSM’s chief financial officer
who had no recollection. The fee was billed by AIC in a “corrected billing,” attributed to
an unrelated bond transaction involving Mercer County, New Jersey and paid by SGC.
The fee was later transferred from AIC to Stifel’s account by Mr. Cochran.
Counts 3 and 5 of the indictment charged Mr. Cochran and his codefendant with
wire fraud in connection with the OCAT transaction, specifically a telephone call from
Stifel to Pacific Matrix directing the Postipankki bid reduction (count 3) and a fax
transmission from Pacific Matrix to Oklahoma bond counsel reflecting the reduced bid
amount (count 5). Counts 9-11 charged Mr. Cochran with wire fraud (deprivation of
honest services) in connection with the SSM transaction, specifically the telephone call
where Stifel and SGC employees agreed that the Stifel fee would be billed to the Mercer
County, New Jersey bond issue (count 9), the fax transmission accomplishing same
(count 10), and the wire transfer of the $100,000 fee from New York to Oklahoma (count
11). Count 2 and 12 charged money laundering of the proceeds of the above two wire
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fraud schemes (and another upon which conviction was not had) by transferring the
proceeds from the AIC account to Stifel. Count 6 charged interstate transportation of
money taken by fraud, specifically the $529,241.09 fee check from Postipankki to AIC.
Discussion
On appeal, Mr. Cochran contends that it was error (1) to construe 18 U.S.C.
§ 1343 to criminalize nondisclosure of fees received by an investment firm in the absence
of proof of a duty to disclose such information, (2) to construe 18 U.S.C. § 1343 to
criminalize such nondisclosure in the absence of proof that the alleged nondisclosure
caused, or was intended to cause, a loss of money or property to which the alleged
“victim” had some claim of right, and (3) to construe 18 U.S.C. § 1343, as amended by 18
U.S.C. § 1346, to criminalize nondisclosure of receipt of a fee by an underwriter in the
absence of proof that knowledge of the receipt of the fee would have had some tangible
effect on the alleged “victim.” He also contends that (4) retroactive imposition of a duty
to disclose information upon a private individual in a private business transaction as a
predicate for criminal liability is a deprivation of due process of law, (5) insufficient
evidence supports the wire fraud convictions, (6) it was prejudicial to submit alternative
theories of wire fraud to the jury in the disjunctive when such theories are charged in the
indictment in the conjunctive, (7) his conviction as an aider and abettor on the OCAT
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wire fraud counts is precluded by the acquittal of his codefendant on the same counts, and
(8) reversal of the wire fraud convictions requires reversal on the other counts of
conviction. We address only those arguments necessary to resolve the appeal.
Mr. Cochran contends that his convictions on the wire fraud counts cannot stand
due to a failure of proof. In essence, his challenge is to the sufficiency of the evidence.
See United States v. Catalfo, 64 F.3d 1070, 1076 (7th Cir. 1995), cert. denied, 116 S. Ct.
1683 (1996). We review the evidence and the inferences in the light most favorable to
the government to determine whether a rational jury could have found a defendant guilty
beyond a reasonable doubt. Jackson v. Virginia, 443 U.S. 307, 319 (1979); United States
v. Hooks, 780 F.2d 1526, 1529-31 (10th Cir.), cert. denied, 475 U.S. 1128 (1986).
The elements of wire fraud under 18 U.S.C. § 1341 are: “(1) a scheme or artifice
to defraud or obtain money by false pretenses, representations or promises; and (2) use of
interstate wire communications to facilitate that scheme.” United States v. Drake, 932
F.2d 861, 863 (10th Cir. 1991). A scheme to defraud focuses on the intended end result
and affirmative misrepresentations are not essential; by contrast a scheme to obtain
money by false pretenses, representations or promises focuses instead on the means by
which the money is obtained and particular false pretenses, representations or promises
must be proved. United States v. Cronic, 900 F.2d 1511, 1513-14 (10th Cir. 1990).
“[A] scheme to defraud is conduct intended or reasonably calculated to deceive
persons of ordinary prudence or comprehension.” United States v. Hanson, 41 F.3d 580,
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583 (10th Cir. 1994). The objective reference to “persons of ordinary prudence or
comprehension” assists in determining whether the accused’s conduct was “calculated to
deceive.” Drake, 932 F.2d at 864. Fraudulent intent is required. United States v. Themy,
624 F.2d 963, 965 (10th Cir. 1980). That said, a scheme to defraud by false
representations may be accomplished by patently false statements or statements made
with a reckless indifference as to their truth or falsity, and deceitful concealment of
material facts may constitute actual fraud. Williams v. United States, 368 F.2d 972, 975
(10th Cir. 1966), cert. denied, 386 U.S. 997 (1967); Gusow v. United States, 347 F.2d
755, 756 (10th Cir.), cert. denied, 382 U.S. 906 (1965). “[E]ven though a defendant may
firmly believe in his plan, his belief will not justify baseless or reckless representations.”
Themy, 624 F.2d at 965.
A. OCAT Transaction
Mr. Cochran argues that he had no duty to disclose (to OCAT) the Stifel
commission on the guaranteed investment contract placed with Postipankki bank. In
deciding this issue, we resolve the conflicts in underlying evidence in favor of the
government--thus, for purposes of our analysis, Mr. Cochran was involved in the OCAT
reinvestment transaction and the Stifel fee was not disclosed to OCAT. See United States
v. Brown, 79 F.3d 1550, 1555-56 (11th Cir. 1996). Mr. Cochran bases his argument on
the Supreme Court’s holding in Chiarella v. United States, 445 U.S. 222, 235 (1980), that
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“[w]hen an allegation of fraud is based upon nondisclosure, there can be no fraud absent a
duty to speak.” See also United States v. Irwin, 654 F.2d 671, 679 (10th Cir. 1981), cert.
denied, 455 U.S. 1016 (1982) (“there can be no criminal conviction for failure to disclose
when no duty to disclose is demonstrated”). He points out that the government
completely failed to prove the existence of a known duty on his part to disclose the fee.
At oral argument, the government could not inform us of any statute, regulation, common
law or contractual provision that required disclosure of the fee. Our subsequent reading
of the testimony confirms a lack of public or private regulation concerning reinvestment
broker fees during the pertinent time period. Tr. 1024-29 (Pacific Matrix reinvestment
broker).
While a fiduciary relationship is not an essential element of a wire fraud
prosecution, United States v. Allen, 554 F.2d 398, 410 (10th Cir.), cert. denied, 434 U.S.
836 (1977), it can trigger a duty of disclosure as can some other relationship of trust and
confidence between the parties. Chiarella, 445 U.S. at 228. In a fiduciary-like
relationship, “a reasonable person is always permitted to rely on the recommendations of
a particular person; and, certain people must always disclose facts where nondisclosure
could result in harm.” Brown, 79 F.3d at 1557. Even apart from a fiduciary duty, in the
context of certain transactions, “a misleading omission[] is actionable as fraud . . . if it is
intended to induce a false belief and resulting action to the advantage of the misleader and
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the disadvantage of the misled.” Emery v. American General Finance, Inc., 71 F.3d 1343,
1348 (7th Cir. 1995).
The evidence in this case does not support such a duty, nor does it support the
government’s alternate theory that Stifel’s nondisclosure coupled with its allegedly
affirmative misstatements of fact (the net bids) induced false beliefs regarding the amount
of the Postipankki bid to OCAT. In reality, we analyze the government’s alternate theory
virtually the same way as its nondisclosure theory because the alternate theory
presupposes a duty to disclose with any statements unaccompanied by such disclosure
deemed fraudulent. See Reynolds v. East Dyer Development Co., 882 F.2d 1249, 1252-
53 (7th Cir. 1989).
The government makes much of the underwriting relationship between Stifel and
OCAT, arguing that it created a fiduciary duty or relationship of trust and confidence
between the parties requiring disclosure of the spread between the gross rate and net rate
and the fee paid by Postipankki to Stifel. While it is true that Stifel was co-managing
underwriter of the bonds (with Leo Oppenheim & Co.), the notion that this engagement
somehow extended gratuitously to reinvestment of $54 million in bond proceeds is not
only unsupported, but also is contrary to the record. Stifel underwrote the bonds, and
eventually placed them despite their credit risk. Tr. 3473-75. The bond closing occurred
on November 12, 1992. Negotiations for the guaranteed investment contract transactions
occurred thereafter, during the reinvestment period. Id. 1541-42.
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Mr. Trent of OCAT was aware not only that investment of the proceeds was
different than the actual underwriting process, but also that the bond issue had closed and
the underwriting period had ended. Id. 1541-42, 1570. During the reinvestment phase,
OCAT did not seek competitive bidding on the guaranteed investment contract. Although
Mr. Trent testified that he thought Stifel and Oppenheim ought to advise OCAT on the
selection of an investment contract because they had structured the bond issue and had an
interest in making sure that bond issue did not fall short on construction, he also testified
that he did not expect Stifel to take an active role, but rather to advise the bond trustee.
Tr. 1512-13, 1542-43.
Despite the government’s dogged insistence of Mr. Trent’s actual reliance on
Stifel, Mr. Trent’s testimony is unanimous that he looked to the bond trustee, not Stifel, to
make the reinvestment decision and to evaluate and approve the guaranteed investment
contract. Id. at 1511, 1515, 1527, 1531, 1571-77. The bond trustee was no doubt in a
fiduciary relationship vis-a-vis OCAT.
Mr. Trent’s testimony that he expected Stifel to work for free on the reinvestment
phase and that had Stifel wanted a fee, it should have asked, id. 1542-43, does not create a
duty of disclosure on the part of Stifel as a coparticipating broker in the reinvestment
phase. Mr. Trent admitted that neither Mr. Cochran nor his codefendant had a fiduciary
relationship with OCAT during the reinvestment phase. Id. 1574-75. This is not
surprising given that Mr. Trent had been involved in seventeen or eighteen bond issues,
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had “constant contact” with underwriting firms in Oklahoma City, and often sought their
advice. Id. 1517-18. He conceded that in previous OCAT transactions in which he has
participated, OCAT paid the trustee bank a fee for reinvestment of bond proceeds. Id.
1552. No one contends that Pacific Matrix, as coparticipating broker in the reinvestment
phase, was not entitled to a fee or was required to disclose its fee to OCAT.2 During the
time period in question, Pacific Matrix routinely split fees with investment bankers,
including Stifel and “[j]ust about everybody we dealt with.” Id. at 1034. Nothing on this
record suggests any principled distinction between Stifel and Pacific Matrix.
Although the representative from Postipankki testified that he was upset with the
size of the fee, he discussed the circumstances with his boss and determined that
Postipankki had no grounds to protest the fee. Id. at 1733. He asked Pacific Matrix if the
2
Mr. Trent testified on direct:
Q. Were you even aware that there was, in fact, a broker fee?
A. I would tell you that I would presume there
would have been one. I would have no idea or
nothing to compare it as to figuring out what an
amount would be or anything else. You know, I
mean, just logic told me that the guy does it for
something. You know, he’s not -- he can’t do it
just because he likes to broker monies, but we
didn’t get involved in that, because it was my
presumption that would be part of the bank
[bond trustee] transaction.
Tr. 1515.
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issuer (OCAT) had been informed of the fee and was told that disclosure was unnecessary
because it was a taxable deal. Id. at 1716. He verified this with bank counsel and felt no
duty to disclose the fee to the issuer. Id. at 1717.
The record makes it clear that even among the government’s industry witnesses no
consensus existed concerning proper reinvestment fee disclosure. Compare id. at 202
(disclosure not required where interest on issue is tax-exempt (although verbal disclosure
given); required where interest is taxable) with id. at 1716 (disclosure required where
interest on issue tax exempt; not required where interest is taxable). In July 1993, after
the events in question the Internal Revenue Service proposed rules concerning the fees on
tax-exempt issues, including a five basis point fee limitation as a safe harbor. Id. at 1026-
27, 3185-86. Regardless, the government’s standardless theory on the OCAT transaction
(which resulted in the highest reinvestment rate OCAT had ever received) “would put
federal judges in the business of creating what in effect would be common law crimes,
i.e., crimes not defined by statute.” United States v. Holzer, 816 F.2d 304, 309 (7th Cir),
cert. granted and judgment vacated on other grounds, 484 U.S. 807 (1987). See also
Matter of EDC, Inc., 930 F.2d 1275, 1281 (7th Cir. 1991) (rejecting lack of moral
uprightness as a standard for wire fraud and mail fraud). The wire fraud counts
pertaining to the OCAT transaction must be reversed.
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B. SSM Transaction
Under 18 U.S.C. § 1346, a “scheme or artifice to defraud” includes “a scheme or
artifice to deprive another of the intangible right of honest services.” The government
charged Mr. Cochran with wire fraud alleging he attempted to deprive SSM and its
bondholders of the right to Stifel’s honest services. We are thus confronted with an
application of § 1346 to a commercial transaction outside the public sector.
At the time of the transaction, a representative of SGC believed that the escrow
side of the transaction required disclosure of fees, but the forward supply side did not;
moreover, the evidence was, at best, equivocal on whether SGC had a duty independent
of contract to disclose to SSM the $100,000 payment to Stifel. Tr. 2080, 2337. However,
in resolving Mr. Cochran’s challenge to the sufficiency of the evidence, we again take the
facts in the light most favorable to the government. See Brown, 79 F.3d at 1555-56.
Thus, Mr. Cochran (1) obtained the forward supply contract on behalf of SSM pursuant to
a letter agreement, Aplt. App. 4126-28, (2) violated the representation contained in a
certification to bond counsel that the provider of the contract (SGC) paid no other fee
than to SSM, (3) did not disclose the $100,000 fee to SSM, and (4) invoiced the
additional fee to another account.
Mr. Cochran argues that the SSM transaction could not constitute wire fraud
absent proof of some potential loss or injury to the alleged victims. He asserts that “it is
undisputed that the receipt of the $100,000 fee by Stifel from Sakura did not, and could
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not, have any adverse economic effect upon SSM and it is undisputed that interest
payable on the bonds issued by SSM was and is exempt from federal income taxation.”
Aplt. Reply Br. 18. Mr. Cochran bases his argument on United States v. Jain, 93 F.3d
436, 442 (8th Cir. 1996), which held that in the absence of actual harm to the victim,
evidence independent of the alleged scheme is required to show fraudulent intent. See
also United States v. D’Amato, 39 F.3d 1249, 1257 (2d Cir. 1994).
Assuming without deciding that § 1346 has application where a private actor or
quasi-private actor is deprived of honest services in the context of a commercial
transaction, it would give us great pause if a right to honest services is violated by every
breach of contract or every misstatement made in the course of dealing. Cf. United States
v. Sawyer, 85 F.3d 713, 728 (1st Cir. 1996) (“To allow every transgression of state
governmental obligations to amount to mail fraud would effectively turn every such
violation into a federal felony; this cannot be countenanced.”); United States v. Dowling,
739 F.2d 1445, 1449 (9th Cir. 1984) (rejecting contention that unlawful conduct alone
constitutes fraud for purposes of the mail fraud statute), rev’d on other grounds, 473 U.S.
207 (1985). We agree with the Eighth Circuit, however, that § 1346 must be read against
a backdrop of the mail and wire fraud statutes, thereby requiring fraudulent intent and a
showing of materiality.3 Jain, 93 F.3d at 442; see also Sawyer, 85 F.3d at 725, 729. We
3
See United States v. Gray, 96 F.3d 769, 774-75 (5th Cir. 1996) (citing
United States v. Ballard, 663 F.2d 534, 540-42 (5th Cir. 1981), modified on reh’g, 680
F.2d 352 (5th Cir. 1982)). Although materiality is not an independent element of a wire
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acknowledge that where actual harm exists as a natural and probable result of a scheme,
fraudulent intent may be inferred. D’Amato, 39 F.3d at 1257. But we agree that in the
absence of actual or potential harm, evidence independent of the alleged scheme must be
adduced to show fraudulent intent towards the alleged victims. Jain, 93 F.3d at 442;
D”Amato, 39 F.3d at 1257.
Because the SSM refunding issue was yield restricted, the $100,000 payment from
Sakura to Stifel could not have been paid to or on behalf of SSM without jeopardizing the
tax-exempt status of the bonds. Indeed, an SSM administrator was upset to find out that
fraud prosecution, “there is a materiality aspect to the determination whether the acts of
an accused give rise to a scheme to defraud,” that “is appropriately submitted to the jury
as one component of the larger factual question as to the existence of fraud and a scheme
to defraud.” United States v. Daily, 921 F.2d 994, 1006 (10th Cir. 1990), cert. denied,
502 U.S. 952 (1991). See also Aplt. App. 153-54 (jury instruction on wire fraud). A
misrepresentation is material if it has a natural tendency to influence or is capable of
influencing the decision maker. See United States v. Gaudin, 115 S.Ct. 2310, 2313
(1995); Kungys v. United States, 485 U.S. 759, 770 (1988); Daily, 921 F.2d at 1003 n.9;
United States v. Haddock, 956 F.2d 1534, 1550 (10th Cir.), cert. denied, 506 U.S. 828(1992), abrogated, United States v. Wells, 117 S. Ct. 921 (1997); United States v. Halbert,
712 F.2d 388, 390 (9th Cir. 1983), cert. denied, 465 U.S. 1005 (1984).
United States v. Wells, holding that materiality of the falsehood is not an element
of the crime of making a false statement to a federally insured bank under 18 U.S.C.
§ 1014, is not to the contrary. In Wells, the Court concluded that the term “false
statement” contained in the statute carried no common law meaning requiring materiality.
Id., 117, S.Ct. at ; 1997 WL 78052, *6. However, fraud has always required that
misrepresentations or omissions be material to be actionable. See BMW of North
America, Inc. v. Gore, 116 S. Ct. 1589, 1600-01 (1996); United States v. Carpenter, 95
F.3d 773, 778 (9th Cir. 1996) (Ferguson, J., dissenting) (“In all fraud cases (civil and
criminal) only one kind of misrepresentation matters--a material representation. . . .
Quite simply, not all lies support liability.”), cert. denied, 1997 WL 47820.
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SSM could not share in a $1 million profit on the reinvestment phase of the transaction
because of the yield restriction. Tr. 2523-27. Thus, the government does not argue that
SSM was deprived of the additional fee. Rather, “the sole theory presented to the jury on
the SSM transaction was the right to honest services breached by defendant’s conduct in
failing to disclose the secret Stifel fee through the false broker certification and through
the ‘corrected’ billing to the Mercer County transaction.” Aplee. Br. at 23 n.14.
Stifel completed a broker’s certificate that represented that no payments would be
made by SGC to or for the benefit of SSM, and that no payments would be made by or on
behalf of SGC to any other person.4 Concerning the latter representation, Stiffel failed to
disclose a subsequent $100,000 fee from SGC to Stifel. The government urges that the
representation and the failure to disclose carried with it the potential for harm because the
fee could have jeopardized the tax exempt status of the bonds by increasing the yield.
Although Illinois bond counsel testified generally that he relied upon the certifications by
4
The certification provided:
8. To the best of my knowledge, no payments will be
made by or on behalf of SGC to or for the benefit of SSMHC,
other than as specified in the forward supply agreements
being provided by SGC.
9. Except as provided in paragraph 8, to the best of the
Broker’s knowledge, no payments will be made by or on
behalf of SGC to any person.
Aplt. App. 4131. To the extent the government has argued that representation number 8
was violated, the testimony is completely to the contrary.
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Stifel and SGC, id. at 2462, 2468, he also testified that additional payments by SGC could
violate the arbitrage restrictions only if they were to or for the benefit of SSM.5 Id. at
2466. According to some testimony, whether a fee generated on reinvestment proceeds
was part of the yield was a question on which lawyers disagreed. Tr. 1028. Even
assuming it was, there simply was no testimony indicating that a fee paid by SGC directly
to Stifel for services rendered to SGC might somehow be considered as paid “to or for the
benefit of SSM” for IRS aggregation of yield purposes, let alone testimony explaining
5
Q: Why is it important to know about the fees?
A: Well, it’s important to know about the fees
because our view of the arbitrage regulations is
that if there are fees that are paid for the benefit
of SSM, even though they’re not paid as
consideration to SSM, but there are fees that are
paid by Sakura Global Capital, they could be
treated as being paid to SSM, in which case it
would increase the amount that we treat as them
[SSM] receiving from this forward supply
agreement.
For example, I mean, if Sakura Global Capital said, “We’re going to
pay $10,000 for your salaries or your overhead and we’re going to
give you $400,000 as consideration for this right to reinvest under
the forward supply agreement, we would say they [SSM] really
received $410,000, even though the forward supply agreement says
that they only got $400,000.
Q: So the fees might be attributed to the issuer?
A: Be attributed to the issuer because they benefit the issuer.
Tr. 2460-61.
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how this could be so. In fact, bond counsel on redirect expressly declined to express an
opinion on whether any payments were made which would contradict his certification of
tax status of the issue. Tr. 2478.
We are mindful that a scheme need not be completed to constitute wire fraud,
United States v. Stewart, 872 F.2d 957, 960 (10th Cir. 1989), so the government was not
required to prove that the tax exempt status of the interest was actually revoked. That
said, our responsibity to construe the evidence and its inferences in the light most
favorable to the government does not allow us to supply missing evidence on complicated
tax questions. We cannot rely on the government’s broad statement in its brief that all
investment agreement fees were attributable to the issuers as a benefit, Aplee. Br. at 27,
when it is not supported by the testimony and ignores the careful distinction made by
bond counsel that the payments must be “to or for the benefit” of the issuer. No evidence
indicates that the representation that no payments will be made by SGC “to or for the
benefit of SSM” was breached. Though Stifel misrepresented that SGC would not pay an
additional fee to Stifel for the forward supply contract, this information resulted in no
actual or potential harm to SSM. Nor did Stifel’s instructions to SGC to bill its fee to the
Mercer County account. No evidence independent of the alleged scheme suggests in any
way that Mr. Cochran sought to harm SSM or its bondholders. See Sawyer, 85 F.3d at
725 (Although a public official may engage in reprehensible conduct related to his office,
“the conviction of that official for honest-services fraud cannot stand where the conduct
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does not actually deprive the public of its right to her honest services, and it is not shown
to intend that result.”). Moreover, we know not from this record how SSM would have
changed its conduct had the disclosure been made. See Gray, 96 F.3d at 774-75. Thus,
the wire fraud counts concerning the SSM transaction cannot stand.
Having determined that the wire fraud counts attributable to the OCAT and SSM
transactions cannot stand for want of proof of criminal fraud, the remaining counts of
conviction must be reversed. See Brown, 79 F.3d at 1562.
REVERSED.
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