United States v. Gregory ( 2022 )

Appellate Case: 20-3232 Document: 010110767996 Date Filed: 11/14/2022 Page: 1
FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS November 14, 2022
Christopher M. Wolpert
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v. No. 20-3232
TROY A. GREGORY,
Defendant - Appellant.
_________________________________
Appeal from the United States District Court
for the District of Kansas
(D.C. No. 2:17-CR-20079-JAR-1)
_________________________________
Solomon L. Wisenberg, Nelson Mullins Riley & Scarborough LLP, Washington, D.C.
(Beverly A. Pohl, Nelson Mullins Broad and Cassel, Fort Lauderdale, Florida, and Reed
J. Hollander, Nelson Mullins Riley & Scarborough LLP, Raleigh, North Carolina, with
him on the briefs), on behalf of the Appellant.
Francesco Valentini, Trial Attorney, U.S. Department of Justice, Criminal Division,
Appellate Section, Washington, D.C. (Nicholas L. McQuaid, Acting Assistant Attorney
General, and Daniel S. Kahn, Acting Deputy Assistant Attorney General, U.S.
Department of Justice, with him on the brief), on behalf of the Appellee.
_________________________________
Before HARTZ, BACHARACH, and EID, Circuit Judges.
_________________________________
HARTZ, Circuit Judge.
_________________________________
Appellate Case: 20-3232 Document: 010110767996 Date Filed: 11/14/2022 Page: 2
Defendant Troy A. Gregory, a former senior vice president of University
National Bank (UNB) in Lawrence, Kansas, was charged with one count of
conspiracy to commit bank fraud in violation of 18 U.S.C. § 1349, four counts of
bank fraud in violation of 18 U.S.C. § 1344, and two counts of making false bank
entries in violation of 18 U.S.C. § 1005. These charges arose from Defendant’s
arrangement of a $15.2 million loan by 26 banks to fund an apartment development
by established clients of UNB.
The four bank-fraud counts, each corresponding to a specific “victim bank,”
alleged that to secure the banks’ participation in funding the loan, Defendant
knowingly made three material misrepresentations: (1) that the borrowers were
financially strong; (2) that the apartment-complex land would be “free and clear” of
debt by the time of the loan; and (3) that the borrowers had $1.705 million in two
certificates of deposit (CDs) at UNB on April 11, 2008, to be pledged as collateral.1
The two counts of making false bank entries were based on Defendant’s listing two
CDs as collateral, and creating corresponding security agreements, when no such
CDs existed. After a ten-day trial, including two days of deliberations, a jury in the
United States District Court for the District of Kansas found Defendant guilty on all
counts except the conspiracy count, on which the jury could not reach a unanimous
verdict. The court sentenced Defendant to 60 months in prison and three years of
supervised release.
1
A certificate of deposit (CD) certifies that a certain amount of money has
been deposited in a bank to remain there for a certain period of time.
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Defendant appeals the district court’s denial of (1) his motion for a judgment
of acquittal and (2) his motion for a new trial on the ground that the government’s
extended hypothetical in closing argument was not based on facts in evidence and
constituted prosecutorial misconduct. Exercising jurisdiction under 28 U.S.C. § 1291,
we affirm. Defendant’s conviction was supported by sufficient evidence and the
government’s closing argument was rooted in evidence presented at trial or
reasonable inferences drawn from that evidence.
I. BACKGROUND
Defendant was a longtime UNB employee and executive who served as the
loan officer for dozens of loans to two limited liability companies, Big D
Development and Big D Construction (collectively “Big D”), and their owners. Big
D’s owners included David Freeman (the largest owner) and two limited liability
companies—Opportune and JMD. Opportune was owned by William Skepnek and
Brennan Fagan. JMD was owned by John Duncan Jr.
In 2006, Big D developed two residential subdivisions (the “Sutter
developments”) in Junction City, Kansas, which comprised mostly single-family
residences. Big D anticipated population growth in the area following the expansion
of the nearby military base, Fort Riley. UNB financed the development, with
Defendant acting as the loan officer; other banks also provided funds through a
participation loan for which UNB was the originating bank. By including other
banks, a participation loan allows a bank to lend some of the money for a project
when the full amount would exceed the bank’s legal lending limit—a cap imposed by
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regulators on the amount that a bank can lend to an individual borrower based on the
bank’s capital—or would otherwise be considered uncomfortably large for the bank.
In a participation loan the “originating” or “lead” bank (here, UNB) is typically the
only bank to deal with the borrowers directly. The lead bank may deal directly with
each of the participating banks or deal solely with a “correspondent” bank that
handles matters with the participants. Bankers’ Bank of Kansas (BBOK) served as
the correspondent bank for the Sutter developments.
The Sutter-development units did not sell as expected. By June 2007, 242 of
the 538 lots remained unsold; and little changed through the fall, leaving Big D with
virtually no income. In addition, Big D was unable to secure much-needed funding
from the state’s Rural Housing Incentive District program, which provides certain
payments to developers in qualifying areas. According to Big D owner Fagan, by late
2007 Big D was in a “[t]errible” financial position. R., Vol. IV at 818. It still owed
UNB $1.9 million on the Sutter developments and was unable to keep up with
payments on those and other debts to UNB. John Larkin, the owner of Larkin
Excavating—which performed excavating work on the Sutter developments—
testified that he was never timely paid for his work, with payments on invoices being
90, or even 120, days past due.
Individual Big D owners were struggling too. Duncan testified that he was
having “cash flow issues” during this time and was unable to keep up with his debt at
UNB. R., Vol. VII at 1693, 1700. By mid-2007 he owed more than $1.9 million on
his own loans at UNB. He testified that he was unable to make any payments on the
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loans and that he worked with Defendant to renew or extend past-due loans, often
just for a short period; he did not recall ever discussing with Defendant during this
time how a loan would be repaid by the due date. For example, he testified that he
took out a $600,000 loan from UNB (for which Defendant was the loan officer) in
March 2007 to pay down a $3.8 million loan from another bank. When the UNB loan
came due in June 2007, he was unable to pay it back and had to renew the loan
“[c]ountless times.” R., Vol. VII at 1694. Fagan also testified that his personal
financial position “wasn’t good” in late 2007. R., Vol. IV at 819. Still, in November
2007, Defendant arranged for Fagan to incur further debt by taking out a $55,000
loan with UNB (for which Defendant was the loan officer) to help pay past-due
interest on Big D loans. Just how bad the financial situation of the borrowers was
will be described more fully in the discussion of the sufficiency of the evidence.
A. Origins of the Bluejay Loan
In an effort to end their financial distress, some of the Big D owners conceived
of developing an apartment complex in Junction City—dubbed the Quinton Point
Apartments. They believed that once Fort Riley expanded, there would be demand
for rentals, particularly from military families. As Duncan put it, the Big D owners
thought that this project was their “golden goose,” the “end-all, be-all” solution to
their financial problems. R., Vol. VII at 1712, 1731.
The Big D owners formed a new limited liability company for the Quinton
Point venture, Bluejay Properties. By the beginning of 2008, Bluejay’s owners
included the above-mentioned Big D owners—Freeman, Skepnek, Fagan, and
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Duncan—either individually or via entities controlled by them; and later they added
Larkin, whose company was still owed $1 million for its excavation work on the
Sutter developments. Big D would serve as the contractor on the Quinton Point
project. The Big D owners hoped to make money as owners of Big D on the
construction itself (the construction fees earned on the project would help pay down
its debt) and as owners of Bluejay when they sold the complex.
Bluejay acquired some land, obtained an appraisal valuing the planned
complex at $20.2 million, and received a letter of intent from a potential buyer, TIC
Capital, LLC, to purchase the complex for $17.952 million upon completion. The
estimated construction budget for the project was just under $14.4 million, and the
Bluejay owners proposed borrowing that amount from UNB. Fagan testified that
Defendant seemed “committed to making this loan happen.” R., Vol. IV at 825.
To secure approval for loans over $250,000, Defendant had to submit a credit
request to the bank’s loan committee. If the committee approved the credit request,
UNB’s credit department would obtain the necessary paperwork and prepare the loan
for closing. A $14.4 million loan far exceeded UNB’s legal lending limit of just over
$2 million per borrower and each of the individuals was heavily in debt—with Fagan
and Duncan just below the lending limit. UNB would therefore need help from other
banks to join in a participation loan.
B. UNB’s Loan Statement and Approval
To initiate the approval process for the Bluejay loan, Michael Bartlow, a UNB
vice president of credit administration, drafted a Loan Application/Purpose Statement
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(Loan Statement) dated December 5, 2007. Bartlow’s duties included preparing loan
applications, occasional inspections of construction sites, and other tasks as needed
by management. He testified that Defendant supplied the underlying information that
Bartlow used to draft the Loan Statement and that Defendant reviewed and approved
the document. In addition to listing basic terms and repayment sources (namely, sale
of the apartment complex), the Loan Statement included each individual owner’s
total loan exposure at UNB, brief narrative summaries of the borrowers’ financial
statements, and an overview of the project budget. Defendant presented the
information from the Loan Statement to a UNB committee on December 5, 2007. The
committee approved the loan, “subject to . . . review and acceptance of the contract
with TIC Capital [which had signed a letter of intent] to purchase the apartment
complex after completion”; the loan was also approved by three members of the
board of directors. R., Vol. IX at 2216. (The TIC contract was executed in April
2008, before the loan closed.)
Defendant then enlisted the help of BBOK as the correspondent bank with
responsibility for soliciting and managing relationships with participant banks. This
was a familiar role for BBOK. As a “banker’s bank,” its customers were other banks
rather than the public, and it often sought and facilitated loans in which a number of
smaller banks could participate. UNB was responsible for gathering the relevant
information from its records and from the borrowers and providing that information
to BBOK so potential participant banks could make informed decisions. UNB would
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also manage the relationship with the borrowers, so the other banks would not
communicate directly with them.
On December 10, 2007, Defendant sent the Loan Statement to Craig Ellis, a
loan officer at BBOK, in an email that stated: “Please review and call me so we can
go over everything.” R., Vol. XIII at 3026.
C. BBOK’s Offering Package to Participant Banks
Ellis did not testify at trial, but both UNB and BBOK employees testified that
substantive communications regarding the loan would typically have been between
Ellis and Defendant (although their assistants exchanged paperwork). Rhonda Scott, a
UNB loan administrative officer who reported to Defendant, testified that Defendant
was responsible for handling the communications and relationship with BBOK,
where Ellis was the primary point of contact. And Jeannie Dailey, a former BBOK
loan officer who helped Ellis analyze the proposed loan, testified that Ellis and
Defendant had conversations about the loan and any questions she had about the loan
would flow through Ellis to Defendant and back to her through Ellis; any relevant
information about the borrowers would come from Defendant.
BBOK performed its own analysis of the materials obtained from UNB and
submitted a proposed Offering Package for approval by its loan committee and board
of directors, which is composed of owners of other banks. The Offering Package
included a seven-page Loan Summary and Narrative drafted by BBOK, a copy of
UNB’s Loan Statement, the borrowers’ financial statements, the construction budget,
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an appraisal summary, a market study on similar apartment complexes in the area,
and news articles about development in Junction City.
The BBOK board reviewed the proposal and approved it on January 25, 2008,
subject to the condition that the borrowers put down 15% in equity or cash down
payment. The loan amount also increased from $14.4 to $15.2 million. The Bluejay
owners had initially hoped that they would need to provide only 10% cash or equity
and asked Defendant if other banks would take on the loan for less than 15%. Fagan
testified that the Bluejay owners knew it would be difficult to come up with the
required 15% and that they explored alternative solutions. He said that at one point
they discussed the possibility of a private lender pledging a letter of credit for $2
million on behalf of Bluejay; but “that was ultimately determined to be insufficient”
because BBOK “wanted hard assets.” R., Vol. IV at 827. Fagan “thought the deal was
dead.” Id.On February 1, Ellis emailed Defendant a copy of what had been submitted to
the BBOK board, with a cover note stating: “Troy– Our presentation as we
discussed.” R., Vol. XIII at 3054. On March 21, BBOK distributed to the participant
banks a virtually identical Offering Package.
The March 21 Offering Package: (1) listed as collateral the apartment complex
and “$1,400,000 in a certificate of deposit @ UNB pledged to the loan,” R., Vol. XII
at 2879; (2) said that the “Borrower’s equity in this project is the land which is owned
free and clear,” id. at 2883 (emphasis added); and (3) provided financial information
about Bluejay owners Freeman, Duncan, Skepnek, and Fagan, who were guarantors
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on the loan (there was little information available about Bluejay itself, as it was a
new entity).
The financial information consisted of a brief statement and chart overview of
the owners’ net worth and liquid assets. For more detail the Offering Package pointed
to UNB’s Loan Statement, as well as individual financial statements prepared by the
borrowers and sent to BBOK by UNB. The Offering reported that UNB’s experience
with Freeman (Big D’s largest owner) “has been very positive and he has shown a
trend of successful operations,” R., Vol. XII at 2882; and it added that Freeman
would soon have much greater liquidity as he would be receiving almost $4 million
from Junction City for development work on the Sutter developments. In a closing
bulleted summary of the strengths and weaknesses of the loan, BBOK included as
weaknesses the “Limited liquidity of the members” and “Limited hard cash in the
project.” Id. at 2884.
D. The Participation Agreements, Loan Documents, and Loan
Closing
UNB and BBOK signed a Participation Agreement and Certificate, dated April
11, 2008. To provide the required cash or collateral of 15% of the loan (15% of $15.2
million = $2.28 million), it specified that the loan was secured by (1) a “Security
Agreement from Big D Development dated 4-11-08 covering a CD for $205,000”;
(2) a “Security Agreement from John Duncan dated 4-11-08 covering a CD for
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$1,500,000.00,”2 R., Vol. XI at 2629; and (3) a mortgage on the land for the
development, which had been represented in the Offering Statement as being owned
free and clear and having an appraised value of $575,000. On April 11 Freeman,
Duncan, Larkin, Fagan, and Skepnek had come to Defendant’s office to sign the loan,
the mortgage, and the security agreements pledging as collateral two certificates of
deposit (identified by their account numbers) authorized by Defendant and dated
April 11. Each CD stated that “Depositor . . . has deposited with [UNB] the [relevant]
amount,” that the opening date was “4/11/08,” and that the “opening deposit amount”
was, respectively, $205,000 and $1.5 million. R., Vol. X at 2476, 2480. Catherine
Gaines, a BBOK credit-administration manager who drafted the agreement, testified
that she “described all the collateral based on the documents I had received from
[UNB],” which apparently included signed copies of the security agreements for the
CDs dated April 11. R., Vol. VII at 1632.
The Participation Agreement also included the following commitment:
Originating Bank [UNB] expressly states that is [sic] has no actual
knowledge, nor made any misrepresentation of fact to Purchasing Bank
[BBOK], regarding any material adverse credit experience with Borrower,
or any other party to the Loan, including, but not limited to, overdrafts, loan
or credit loss charge-offs, classification of loan by bank examiners,
bankruptcy proceedings, or loan delinquency of 60 days or more, that has
not been disclosed in writing by Originating Bank to Purchasing Bank prior
to acceptance of this Participation.
2
Although the Offering Package sent to the participants on March 21 initially
represented that there was “$1,400,000 in a certificate of deposit @ UNB pledged to
the loan,” R., Vol. XII at 2879, this number later increased to $1.705 million in CDs,
apparently to help reach the 15% cash-or-equity requirement. The updated CD value
(at $1.705 million) and the land (valued at $575,000) together totaled $2.28 million.
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R., Vol. XI at 2630.
On April 17 the participant banks each received and signed their own
participation agreements with BBOK—referred to as addendums to the UNB-BBOK
agreement. These agreements included the same representations as above about the
collateral and they stated that the participants were agreeing to the terms and
conditions set forth in the UNB-BBOK Participation Agreement.3
The loan closed and the first installment of about $2.4 million was disbursed
on April 28. The evidence at trial showed that there were no CDs on April 114 and
the land, rather than being free and clear, was encumbered by prior liens exceeding
the value of the land. Contrary to the participation agreements, the CDs were paid for
and title to the land was cleared only when the loan was closed—by using proceeds
of the Bluejay loan and additional loans to Duncan and Freeman not disclosed to the
3
There was some dispute at trial about when the UNB-BBOK Participation
Agreement was signed. The jury was provided two copies of the agreement; both are
signed by Defendant and Ellis and the date next to Ellis’s signature is April 11 on
both. On one, the date next to Defendant’s signature is April 28; on the other, there is
a clearly different signature of Defendant and there is no date next to it. Defendant
maintains that he signed the agreement on April 28 and does not explain when the
other copy was executed. But the jury could reasonably infer that the copy with the
undated signature was signed before April 17, when the participation agreements
were sent to the participant banks. In any event, we fail to see any relevance of the
signing date to the fraud allegations.
4
Defendant suggests that the CDs existed but were just “unfunded.” But, as
the FDIC examiner testified, “[T]here is [no] such thing as an unfunded CD.” R. Vol.
III at 642. No one would say that he has an “unfunded $100,000 in his bank account.”
In any event, the CDs stated that the depositor had deposited with UNB the amount
stated.
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participating banks. In our discussion of the sufficiency of the evidence, we will
provide details of the deception involved in this effort.
II. SUFFICIENCY OF THE EVIDENCE
“In determining whether the government presented sufficient evidence to
support the jury’s verdict, this court must review the record de novo and ask only
whether, taking the evidence—both direct and circumstantial, together with the
reasonable inferences to be drawn therefrom—in the light most favorable to the
government, a reasonable jury could find Defendant guilty beyond a reasonable
doubt.” United States v. Scull, 321 F.3d 1270, 1282 (10th Cir. 2003) (brackets and
internal quotation marks omitted).
A. Bank Fraud
The federal bank-fraud statute prohibits the execution or attempted execution
of a scheme or artifice (1) “to defraud a financial institution,” 18 U.S.C § 1344(1), or
(2) “to obtain any of the moneys, funds, . . . or other property owned by, or under the
custody or control of, a financial institution, by means of false or fraudulent
pretenses, representations, or promises,” Id. § 1344(2). Defendant was charged, the
jury instructed, and the jury found him guilty under both prongs of § 1344 for all four
counts of bank fraud, each one of which corresponds to a victim bank. His conviction
stands if a reasonable jury could have found him guilty under either prong. See
United States v. Iverson, 818 F.3d 1015, 1026 (10th Cir. 2016).
To prove a § 1344(1) violation, the government must show that “(1) the
defendant knowingly executed or attempted to execute a scheme or artifice to defraud
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a financial institution; (2) the defendant had the intent to defraud a financial
institution; and (3) the bank involved was federally insured.” United States v.
Flanders, 491 F.3d 1197, 1212 (10th Cir. 2007). To prove a § 1344(2) violation, the
government can show “(1) that the defendant knowingly executed or attempted to
execute a scheme . . . to obtain property by means of false or fraudulent pretenses,
representations or promises; (2) that defendant did so with the intent to defraud; and
(3) that the financial institution was then [federally] insured.”5 United States v.
Rackley, 986 F.2d 1357, 1360–61 (10th Cir. 1993). Section 1344(2) does not require
intent to defraud the financial institution, just the third party whose property is being
taken. See Loughrin v. United States, 573 U.S. 351, 353 (2014).
Under both prongs, fraud “requires a misrepresentation or concealment of
material fact.” Flanders, 491 F.3d at 1212 (internal quotation marks omitted). The
jury was instructed that Defendant could be liable as a principal under 18 U.S.C. § 2if the jury found that he aided, abetted, counseled, commanded, induced or procured
bank fraud. The jury could also find Defendant guilty if he “willfully cause[d] an act
to be done which if directly performed by him or another” would constitute bank
fraud. R., Vol. II at 360. For each of the four bank-fraud counts, the government
alleged that Defendant made or caused to be made three independently sufficient
misrepresentations with intent to defraud: (1) that the borrowers were financially
strong; (2) that the borrowers would bring the Quinton Point land free and clear of
5
BBOK and the four victim banks are all federally insured.
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any debt; and (3) that the borrowers had $1.705 million in CDs at UNB as of April
11, 2008.
The government introduced sufficient evidence from which a reasonable jury
could find the elements of bank fraud beyond a reasonable doubt. To start with, a
jury could reasonably conclude that a competent banker would have been unlikely to
participate in the Bluejay loan if any of the misrepresentations had been corrected. To
reach this conclusion the jurors needed to be educated on the factors that enter into a
banker’s decision to grant a loan. They were informed at trial that more is necessary
than just a proposed reasonable use of the borrowed money (such as a building
project) that is expected to earn a profit. After all, things do not always go as
planned. (The record indicates that the completed Quinton Point project sold for less
than $8 million, not the proposed $17.952 million.)
Kaye Finn, a senior risk-management examiner for the Federal Deposit
Insurance Corporation (FDIC), and representatives from each of the four victim
banks identified in the indictment—Blake Heid, president and CEO of First Option
Bank; Donald Whelchel, loan officer at Peoples State Bank; Patrick Walsh, a member
of the Board of Directors of Lyndon State Bank; and David Brownback, president
and CEO of Citizens State Bank and Trust—testified about the types of information
banks evaluate and expect to receive when they are asked to consider a loan, enabling
them to assess the risk and make reasonable decisions. In addition to the terms of the
loan itself, potential lenders consider the character of the borrowers, their capacity to
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repay, and what they have pledged as collateral (which some of the representatives
referred to as the three Cs of credit).
Character refers to how trustworthy a borrower is in repaying its debts. The
bank looks at the borrower’s credit history and how it has repaid loans in the past as
indications of how the borrower will uphold its obligation if a loan is made. Lenders
need to know the character of both the borrower and those serving as guarantors on
the loan.
Capacity to repay is an assessment of the borrower’s overall financial status,
including its cash flow, liquidity, and other outstanding debts. To assess capacity,
banks rely on financial statements and, as when assessing character, the borrower’s
loan history. In the context of a participation loan, representations by the originating
bank about the history of its relationship with a borrower—who is often unknown to
the prospective participants—are critical. Repeat delinquencies and overdrawn
accounts “raise[] a red flag.” R., Vol. III at 637.
Finally, the collateral pledged to secure a loan reduces risk for lenders in two
ways: First, it ensures that the borrower has “skin in the game,”—i.e., that it has its
“own money on the line [and not just] borrowed funds.” R., Vol. VIII at 1895. As one
bank representative put it: “[W]hen people have to put money down . . . , then they
usually have a higher tendency to pay those loans back.” R., Vol. III at 681. Second,
if there are problems collecting the money owed, the banks can rely on the collateral
for partial repayment.
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As the FDIC examiner and the officers from the victim banks testified, banks
do not make loans unless they are confident about these three Cs of credit. A
reasonable jury could find that the Bluejay loan failed miserably on all accounts.
Because of Defendant’s misrepresentations, however, the participating banks were in
the dark about these serious shortcomings.
1. Financial strength of borrowers
We begin with the allegation in the indictment that Defendant misrepresented
the borrowers’ financial strength—in other words, their character and capacity to
repay the loan. The participating banks based their decisions on the Offering
Package—which included and was derived from information provided by UNB. The
officers from the victim banks testified that they rely on information from the lead
bank and expect it to be forthcoming in describing what it knows about the
borrowers. As Brownback of Citizens State Bank and Trust explained: “[W]e really
can’t judge character ourselves so we’re looking for something from the originating
bank who does have that ability . . . and . . . character is the [] No. 1 thing in making
a loan decision and next is the ability to pay.” R., Vol. VIII at 2013–14. Heid of First
Option Bank testified that he trusts loan offerings—although completed by another
bank—because he “expect[s] bankers to be truthful.” R., Vol. III at 685. Cf. R., Vol.
VIII at 1895 (Walsh agreeing that if the originating bank “knew about a poor history
of paying back loans, [he would] have expected that to be communicated to [him]”);
R., Vol. V at 1362 (former BBOK employee Dailey testified that “full disclosure”—
“put[ting] everything on the table, good or bad,” is a “concept well understood in the
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banking community”). Indeed, in his testimony in a deposition for civil litigation
related to the Bluejay loan, Defendant himself stated that if he were reviewing a
participation opportunity, “he would want to know about the stability of the borrower
just as if he were originating the loan himself.” Ex. 444-D. And he further testified
that as a participant bank “you would have to rely more on . . . the bank’s history
with their borrower,” including delinquencies, which would typically be included in a
“write up” by that bank. Id. To that end, the Participation Agreement, as quoted
above, required UNB to provide any adverse information about the borrowers that
occurred before acceptance of the participation loan but had not yet been disclosed.
Two statements in the Offering Package indicated that UNB’s experience with
the borrowers had been a good one. First, the Loan Statement prepared by UNB
assigned a risk code of 4—on a scale of 1 (virtually no risk) down to 9 (loss assets)
—to the Bluejay loan “because of good collateral values and the financial strength of
the borrowers individually and collectively.” R., Vol. XII at 2888. UNB’s internal
loan policy describes grade four as follows: “This rating will be applied to those
credits that are of average risk. Typical borrowers are small or middle market
operations. Although results may be uneven, only normal amount of monitoring is
required.” R., Vol. XIV at 3494. Brownback from Citizens State Bank and Trust
testified that although each bank has its own risk scale (e.g., 1-to-7, 1-to-10) he could
infer that a rating of four “typically” meant that it was “not a problem loan.” R., Vol.
VIII at 2076. In any event, the statement that the rating was based on “the financial
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strength of the borrowers individually and collectively” would be most peculiar if the
author thought the borrowers were financially questionable or weak.
Second, the Offering Package states: “[UNB] reports that their experience with
[Freeman] has been very positive and he has shown a trend of successful operations.”
R., Vol. XII at 2882. It then adds that Freeman will soon be in even better shape:
It is important to note that Freeman will experience a significant change and
increase in his liquidity. He has received word from the City of Junction City
that they will be funding, in its entirety, the reimbursements for Big D’s
development of the Sutter Woods and Sutter Highlands developments will
occur in the near future. This will result in proceeds just shy of $4MM to
Freeman that will reduce loans at UNB and other debts, reserving an
appropriate amount for tax liabilities. His [net worth] will not change
significantly as this transaction is already factored in, but he will be come
[sic] much more liquid and provide a source for additional capital in this
project as needed. On going [sic] lot sales in those subdivisions will provide
cash flow as well to reduce debt.
Id. at 2883.
The statements in the Offering Package were grossly misleading. The specific
note about Freeman expecting to receive $4 million was simply false. It was a
reference to the Rural Housing Incentive District (RHID) financing. But, as Fagan
testified, Big D had not secured the votes necessary for RHID financing. Three
entities needed to approve Big D’s application; and although the city and school
board voted in favor, the county voted against Big D in December 2007, the month
before BBOK’s board approved the proposed Offering Package and several months
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before it was sent to the participants. Fagan testified that he informed Defendant of
this vote.6
More important, UNB’s relationship with Freeman and the other borrowers
was far from positive. Big D and its members had been singularly unable or
unwilling to keep up on their obligations to UNB even without the Bluejay loan.
UNB records indicate that Big D was having serious problems with cash flow.
Operating accounts were frequently overdrawn—with one account being overdrawn
for 54 consecutive days from early January through early March 2008 (while the
participation loan was under consideration) and another account being overdrawn on
41 days between July 2007 and April 2008. Further, loans made to the Bluejay
owners and their related business entities were consistently past due, either because
they were not paid at maturity or because periodic payments had not been made.
Special Agent Shawn Nickell with the Office of the Inspector General at the Federal
Housing Finance Agency examined UNB’s account and loan history with the Bluejay
borrowers—including the Big D entities and its individual owners—in the ten months
leading up to the Bluejay loan (July 2007–April 2008). During that time the owners
and business entities had 69 loans outstanding with UNB, nearly all of which were
arranged by Defendant. Each month, there were from 6 to 29 loans past due with
combined balances ranging from $2 to $7 million.
6
The county commission’s vote (2-1) against the application turned out to be
void as untimely, so the county allowed Big D to reapply. But the county
unanimously rejected the second application in late 2008.
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Agent Nickell also examined what happened with the loans that matured
(became due in full) during this period. Over the course of the ten months examined,
there were 73 instances of loans reaching their maturity dates (including some
extended or renewed loans reaching maturity multiple times) and only two loans,
totaling just over $200,000, were paid off. He provided a month-by-month summary
of past-due balances and matured loans and correlated them with key events in the
Bluejay loan approval process. In November 2007 there were 18 past-due loans
totaling over $5.2 million; and in December 2007—when Defendant sent BBOK the
UNB Loan Statement—there were 29 past-due loans totaling over $7.1 million. All
but one loan that came due during those two months was extended or renewed for at
least the second time. In January 2008, the month that BBOK approved the Bluejay
loan, and in February 2008, when BBOK drafted and sent a copy of its Offering
Package for Defendant to review, there were six or seven past-due loans totaling over
$2 million. Every loan that came due was extended or renewed. By March 2008,
when BBOK sent the Offering Package to potential participant banks, there were 12
loans totaling over $3.8 million that had past-due payments.
Defendant was well aware of these problems. Two of the Bluejay and Big D
owners testified that they worked closely with him to manage past-due loans. Fagan
testified that between 2007 and 2008, Big D was often “scrambling” to make interest
payments and that the Big D owners regularly spoke with Defendant about how to
make payments that were due and “what was the plan, how [would] we ever get to
where we need to get to pay this stuff off.” R., Vol. IV at 810. In late 2007 and early
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2008 he personally spoke with Defendant “at least weekly, sometimes multiple times
a day, but frequently” about the status of the Sutter developments and outstanding
loans. R., Vol. IV at 812–13. Fagan testified that Defendant often decided how to
remove funds from Big D’s other accounts to take care of delinquent loans if the Big
D owners were unable to make the payments: “I trusted that Troy would go to the
hottest fire first. And [] at the time that was [] really appreciated by us because it kept
us in good standing on loans and kept them renewed so that we could fight another
day.” R., Vol. IV at 818.
Duncan similarly testified that he was frequently in touch with Defendant or
his assistants about his personal loans and that Defendant would often arrange for
extensions without Duncan even asking for them. Defendant would call him in to
sign the papers. Duncan testified that, at the time, he was agreeable to the extensions:
“I didn’t have any choice. I couldn’t pay them off at that particular point in time, so it
was the only methodology for continuing on.” R., Vol. VII at 1715.
Fagan and Duncan further testified that throughout this time Defendant
arranged loans to the Big D owners to cover past-due interest payments. According to
Fagan, in November 2007 he received a call from Defendant to figure out how to
arrange for interest payments that were “significant[ly] delayed” on Big D accounts.
R., Vol. IV at 819. Big D did not have the $55,000 needed to make the past-due
payments so either Defendant or Fagan suggested that UNB issue Fagan a loan,
which he would then use to pay the Big D interest due. And Duncan testified that in
February 2008, Defendant arranged for a $35,000 loan to Freeman and Duncan to pay
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down outstanding interest across several loans. Duncan described himself as
“insolvent” at that time. R., Vol. VII at 1710. The $35,000 loan was set to mature in
just a month, about when the Bluejay loan was expected to close, and, according to
Duncan, would provide funds to pay off some loans. Duncan said that Defendant
never asked him to send BBOK an updated financial statement after this loan; and
there is no evidence this additional $35,000—or any other subsequent debt the
owners took on—was reported to the participant banks. Indeed, UNB records of loans
made to Duncan (which would have been Defendant’s responsibility) showed that
Duncan’s financial statements already underreported his loans and liabilities to UNB
by $1.9 million and overstated the net worth of his related business entity, JDM, by
over $800,000.7
There was also evidence of other arrangements by Defendant to help the Big D
owners stay afloat or at least appear current on their loans. On March 21, 2008—the
day that BBOK sent the Offering Package to the participant banks—Defendant
arranged for a third party to assume a past-due $842,000 Big D loan, secured by a
piece of property the Big D owners had partially developed. The loan was about 100
days past due but could not be renewed because the loan was a participation loan and
the participating bank would not agree. It was assumed by Luke and Sheridyn
7
We note that UNB correctly stated the owners’ UNB loan exposure in its
own December 5, 2007 Loan Summary. But there is no evidence these amounts were
updated to reflect additional indebtedness, and an updated financial statement would
have been one avenue to do so. Thus, the bankers could have read Duncan’s incorrect
financial statement (which postdated the Loan Summary) as the most current source
of information.
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Oehlert. Luke Oehlert had a heating-and-air-conditioning business that did work on
Freeman projects, and he became a friend of Freeman.8 He testified that before he
assumed the $842,000 loan, he attended a meeting with the Bluejay borrowers in
Defendant’s office about securing the Bluejay loan. As he recalled, “It seemed to me
like they were grasping at different ideas on how to come up with” the money or
collateral required to obtain the Bluejay loan. R., Vol. VI at 1394. With respect to the
$842,000 past-due loan, he testified that at the meeting it was decided that after he
assumed the loan, the Bluejay owners would still make the payments and manage the
land themselves. Fagan and Duncan testified to the same arrangement.
The government introduced deposition testimony by Defendant from a civil
case stating that one of the reasons for this third-party assumption was that BBOK
expected all of Big D’s loans to be current as of closing. Further, this transaction
reduced the apparent liabilities of the Big D owners. Duncan testified that he and
Freeman were “at the legal lending limit, and I think we had to move that particular
loan out.” R., Vol. VII at 1726. The assumption enabled UNB to loan additional
funds to the Big D owners.
8
Oehlert appears to have done some heating and air-conditioning work on the
Sutter developments and he had agreed to buy 50 lots (at $20,000 per lot, with
earnest money of $1,000 per lot), but he stopped after building on 12 lots when he
saw that the lots were not selling and raised concerns with the Big D owners. When
he was approached about assuming the $842,000 loan, he agreed because he thought
that in exchange the owners “would let me off the hook” on his commitment on 38
lots. R., Vol. VII at 1391.
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In short, during the ten months preceding the Bluejay loan, the Big D owners
had between $2 million to $7 million in past-due loans each month, and when
payments or loans came due, Defendant routinely arranged for extensions and
renewals, and even arranged for additional loans to cover past-due interest payments.
The new loan activity included (1) a $55,000 loan from UNB to Fagan to pay down
interest due on Big D’s loans at the end of November 2007, just before UNB drafted
its Bluejay Loan Statement on December 5, 2007; (2) a $35,000 loan from UNB to
Freeman and Duncan to pay down their past-due interest in February 2008, the month
after BBOK approved the Bluejay loan; and (3) assumption by Oehlert of an
$842,000 loan to Big D from UNB (although Big D promised Oehlert to continue
making the payments) that was 100 days past due in March 2008—when BBOK sent
the Offering to the banks—and that could not be renewed because of opposition by a
participating bank. Agent Nickell testified that during the ten-month period there
were 73 instances of loans reaching maturity, yet only two loans (a combined
$210,000) were paid off during that time.
Representatives from the four victim banks named in the indictment testified
about the importance of the above undisclosed information to their decisionmaking.
Heid, the president and CEO of First Option Bank, who reviewed the Bluejay
Offering Package in 2008, testified that his bank “would not have participated” if it
had known that the borrowers had multiple past-due loans, one exceeding 90 days.
R., Vol. III at 700. Whelchel, a loan officer at Peoples State Bank who reviewed the
Bluejay loan before it was passed on to the bank’s loan committee, testified that if his
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bank had known about the borrowers’ past-due loans, overdrawn accounts, repeated
extensions and renewals, and loans used to make late interest payments, it would
have viewed the borrowers as “high risk” and would not have agreed to participate.
R., Vol. V at 1255. Brownback, the president and CEO of Citizens State Bank and
Trust who oversaw approval of the Bluejay loan, testified that his bank would have
considered the borrowers a “potential problem” if it had known this information and
would “[a]bsolutely not” have participated. R., Vol. VIII at 2027. And Walsh, a
member of the board of directors at Lyndon State Bank, similarly testified that he
would not have viewed the borrowers as financially strong, and that it would have
influenced his bank’s decision to participate if it had known that the borrowers had
multiple past-due loans.
2. Collateral—CDs and land
After reviewing the proposed Offering Package, BBOK responded in late
January 2008 that it accepted the proposal on condition that the borrowers put down
15% in equity or cash down payment, an increase from the 10% provided in the
proposal. As previously noted, the borrowers and Defendant were very concerned
about this requirement, expressing doubt that it could be fulfilled. They had virtually
no assets that they could pledge to establish their skin in the game: the Quinton Point
land was valued at $575,000, but it was subject to liens totaling over $800,000. Nor
did they have enough money in a bank account, savings account, or a CD that they
could pledge.
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Nevertheless, the April 11 participation agreements declared that the loan was
secured by (1) a “Security Agreement from Big D Development dated 4–11–08
covering a CD for $205,000”; (2) a “Security Agreement from John Duncan dated 4–
11–08 covering a CD for $1,500,000,” R., Vol. XI at 2629; and (3) a mortgage dated
4–11–08 on the land for the development, which had been represented in the Offering
Statement as being owned free and clear. How was this accomplished?
To begin with, the statement in the participation agreements was outright false.
The two CDs did not exist—they had not been funded on April 11, even in part. The
April 11 security agreements were worthless when executed (and when the
participants agreed to the loan). And the land, rather than being owned free and clear
by the borrowers, was burdened with liens exceeding its market value. Defendant has
consistently argued, however, “no harm no foul,” because the CDs had been funded
and the land was free and clear by April 28, the day the loan was closed.
But the jury did not have to buy that argument. There was more than ample
evidence showing that the CDs were funded and the land was cleared of liens by
methods that would not have been acceptable to the participating banks: the
borrowers (through Defendant’s good offices) took on significant new debt
(substantially reducing their net worth) without disclosure to the banks and, primarily
through a sham sale of lumber, used the very money provided by the Bluejay loan to
produce the required collateral.
The materiality of the misrepresentations regarding the collateral is perhaps
best evidenced by the efforts of Defendant to conceal what was going on and by the
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testimony of representatives of the participant banks that the banks would not have
loaned their money had they known that the representations were false. It may be a
bit heavy going, but we will try to describe Defendant’s actions with respect to the
purported collateral. We start with Duncan’s $1.5 million CD.
Duncan did not have $1.5 million to put into a CD so Defendant proposed that
Duncan and his wife borrow money from UNB to create a CD. The Duncans
executed a note for a $1.5 million loan on April 11. But the loan proceeds were not
disbursed to create the CD until April 28, the day the Bluejay loan closed. (The
obvious reason for the delay was that a $1.5 million loan to Duncan would exceed his
loan limit until, as discussed later, other UNB loans to him were paid down with
proceeds of the Bluejay loan.) The note was secured in part by a separate $750,000
CD owned by Duncan, also dated April 11.9 But just as Duncan did not have money
for the $1.5 million CD in the first place, he also did not have money for a $750,000
CD to secure his loan. That CD was not created until the necessary funds were
provided out of the first disbursement (the first “draw”) from the Bluejay loan on
April 28. All this required Defendant to coordinate the timing of several transactions
and create a phony sale.
First, the phony sale. Defendant had to justify distributing money to Duncan
from the first draw. The money initially went to Schmidt Builders Supply, a company
9
This $1.5 million loan was further secured by several other real estate
mortgages (which were also used as collateral on other loans) and the $1.5 million
Bluejay CD itself.
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managed by Duncan and majority-owned by his wife, purportedly to pay for lumber
supplied to the Bluejay project. Before going further, we must pause to recognize that
money is not disbursed from a construction loan to the borrower simply because the
borrower desires, or even needs, the money. Banks generally impose strict limits on
draws from a construction loan. This helps ensure that there is enough money to
complete the project as planned and that the loan will be repaid as expected. See
Alvin L. Arnold & Myron Kove, 1 Construction & Development Financing § 4:262
(3d ed.) (July 2022 update) (a fundamental objective of construction loan
administration is “[t]o insure that disbursements are made only for work already
performed and in place (and for materials purchased and stored but not yet used, if
this is permitted) and only in amounts equal to the value of such work and
materials”). Typically, money is disbursed only after an independent third party, such
as an architect or construction manager, certifies that certain work has been
performed or supplies have been provided to the project. See id. § 4:273 (“Each
request for a loan disbursement should be initiated by an application for payment.
This should specify the amount requested and describe its application to construction
and indirect (soft) costs on an item-by-item basis.”).
In keeping with this industry norm, Fagan testified that he and Defendant
worked out the following “draw process” for requesting funds from the Bluejay loan:
[Defendant] and I agreed—it may have been his idea—that what we would
do is our superintendent[10] at Bluejay would . . . prepare a draw request for
10
Craig Linn was the construction manager on the Bluejay project and is also
referred to as the superintendent.
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work that he believed had been done. He’s out there every day seeing
what’s happening. Then he would submit that to the bank. The bank would
then have a third-party inspector, somebody not related to the bank or
Bluejay, inspect to see that that work was actually performed, and then the
bank would sign off on those. Checks would be printed and checks would
then be brought to me and I would sign them.
R., Vol. IV at 851–52. This was “a safeguard to make sure that . . . you’re not saying
that work has been completed when it hasn’t actually been completed.” Id. at 852.
Fagan testified, however, that he was not involved in the first draw on the loan and
that Defendant was responsible for managing its distribution.
The first draw on the Bluejay loan was dated April 28 and totaled a little over
$2.4 million. Defendant disbursed: (1) $1.225 million to Schmidt Builders Supply
Company; (2) $698,424 to Larkin for excavating work performed by Larkin
Excavating; and (3) $243,252 to Big D, the contractor on the project. The balance
remained in a Bluejay account. The application for payment for this first draw (what
Fagan referred to as a “draw request”)—was signed by the construction manager and
describes in general terms what work had been performed or materials procured. We
are not aware of any evidence of impropriety in the justifications for disbursements
to Larkin and Big D.11 Not so for the Schmidt Builders disbursement.
The application for payment stated that there was $1.225 million worth of
materials “stored to date” for the project, with a corresponding invoice from Schmidt
Builders for $1,356,338, with the message “[$]1,225,000 1st draw” handwritten on it.
11
As we discuss below, some of these disbursements were used to fund
collateral that should have already been in place, but we cannot say that there were
misrepresentations about the work completed in the application for the first draw.
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R., Vol. XII at 4897. During deposition testimony in a civil case, Defendant testified
that he and another UNB employee used this invoice to physically verify that there
was enough lumber at two Schmidt Builders locations for the project and that—as
indeed reflected on the invoice—he placed a checkmark next to the line items he was
able to account for and put an “x” next to line items he could not account for.
Because he was not able to account for everything on the invoice during this
inventory, he reduced the amount to be paid to Schmidt Builders on the first draw to
$1.225 million. (The sum of the items he supposedly verified, however, total to about
$800,000, not $1.225 million.)
Duncan provided a different account. He testified that he forged this invoice
and that Defendant’s inventory was a “charade.” R., Vol. VII at 1768. According to
Duncan, Defendant wanted false documentation that Schmidt Builders was owed
$1.225 million for lumber it had purchased and set aside for the Bluejay project. The
documentation would justify taking that sum in the first draw and using the money to
help pay for the required collateral and pay down some of Duncan’s past-due debt.
Defendant first told Duncan he had to sign “a lumber letter for the file.” R., Vol. VII
at 1751. Fagan testified that he drafted the letter, dated April 16, at Defendant’s
request. It stated:
I have been asked to write this letter to you on behalf of Schmidt Builders
Supply, Inc. with regards to its purchase of the lumber necessary to
construct [Quinton Point Apartments]. As you know, this lumber has been
purchased by Schmidt Builders Supply, Inc. for some time and has been
paid for in full. The lumber inventory for this project can be found at two of
our locations: 1861 E. 1450 Rd., Lawrence, Kansas 66044 and 100 E. 11th
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St., Lawrence, Kansas 66044. This lumber is earmarked for this project and
can be picked up or identified for delivery to the project site at anytime.
R., Vol. X at 2504. Duncan testified that none of this was true: Schmidt Builders had
not yet purchased any lumber for the Bluejay project, there was no lumber earmarked
for the project ready to be delivered, nor would Schmidt Builders set aside this much
inventory because of possible warping, etc. See also R., Vol. VIII at 1919–21
(testimony of Schmidt Builders employee that such a large amount of lumber is
usually purchased wholesale and delivered directly to the jobsite because it is
expensive to handle the material twice). Duncan signed the letter anyway, though,
because the loan had already been approved and “the whole thing [would] fall[]
apart” if he did not. R., Vol. VII at 1755.
Duncan testified that Defendant then asked him for an invoice for the first
draw. Preparing a proper invoice would be a simple matter if Schmidt Builders, as
stated in the lumber letter, in fact had obtained the lumber for the project and had it at
its business locations as earmarked for the project. But because none of the lumber at
Schmidt Builders was appropriate for the Bluejay project (the project required
specialized lumber that Schmidt Builders did not stock), Duncan could not generate a
valid invoice. See Black’s Law Dictionary (11th ed. 2019) (an invoice is “[a]n
itemized list of goods or services furnished by a seller to a buyer” (emphasis added));
see also R., Vol. VIII at 1917 (testimony by Schmidt Builders employee that an
invoice is generated “when [the materials are] actually sold or delivered”). Duncan
told Defendant he could not produce the invoice because it would “completely blow
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up my inventory”: “I told him I couldn’t give him an invoice because in my computer
system, as soon as I do an invoice, it automatically relieves the inventory. Well, when
that happens, I would have had negative inventory everywhere . . . .” R., Vol. VII at
1773. He testified that Defendant responded: “I don’t care how you do it, I need an
invoice.” R., Vol. VII at 1773.
To avoid removing any inventory from his system, Duncan generated a quote,
which simply provides a pricing estimate for customers, and had an employee
“photoshop” the word “invoice” on it. R., Vol. VII at 1774. Through “trial and error,”
he composed a list of lumber that would total to the $1.35 million of lumber that was
expected for the project, which Defendant later changed to $1.225 million for reasons
unknown to Duncan. R., Vol. VII at 1776. Duncan testified that he knew he was
committing a crime when he created the invoice, and he ultimately pleaded guilty to
bank fraud in a separate case in part because of his crafting of this invoice.
As for the supposed inventory Defendant performed to corroborate this
invoice, Duncan said that he took Defendant and a UNB employee to three Schmidt
Builders locations and that they “just walk[ed] through the lumberyard counting
lumber” in inventory “to get to this magical number of 1.35 million.” R., Vol. VII at
1767–68. Duncan would tell them how many pieces of a certain type of wood were
stored in a specific area, they would ask for its value, and Duncan would provide an
estimate. He testified that this lumber was “[a]ll just sitting there ready for sale,
being moved and as we were counting, you know, putting on trucks, being shipped
out.” R., Vol. VII at 1766. Defendant never complained that the lumber was not
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segregated or earmarked for the Bluejay project. Indeed, Defendant admitted during
deposition testimony that he had no idea whether the lumber he counted was
segregated from other inventory as represented in the lumber letter because this was
his first time at a supply store and he did not know how Schmidt Builders stored its
lumber. Defendant further testified that he did not know what types of lumber would
be used in the project and never reconciled the invoice with the construction plan.
Although he placed this invoice in the first-draw application, he did not ask the
project construction manager to review or reconcile the invoice beyond the
“inventory” Defendant performed. Defendant sent an email to Ellis on April 23,
2008, stating that he “personally went and counted the lumber” at Schmidt Builders
on April 21. R., Vol. XIII at 3186.12
In the meantime, Defendant was arranging how the first-draw money to
Schmidt Builders would be spent. On April 17, 2008, he sent Duncan an email stating
he needed Duncan to write four personal checks (on Duncan's account at Commerce
Bank & Trust), worth a combined $1,389,950: (1) $750,000 “to put into a CD as
additional collateral on the $1,500,000 loan (Larkin is ready to send you $250K of
this)”; (2) $250,000 “to pay down our land loan on Quinton Point[]”; (3) $350,000 to
pay down a separate $650,000 loan to Duncan; and (4) $39,950 to pay down another
Duncan loan. R., Vol. XIII at 3172. He added: “I will have a check for the lumber in
12
Defendant told Ellis that he counted the lumber on April 21, yet the quote
Duncan photoshopped into an invoice was not produced until April 24, so it is
unclear what Defendant used to count the lumber. Defendant could not account for
this discrepancy during his deposition.
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the amount of $1,350,000.00[.]” Id. Duncan testified that he went to Defendant’s
office that day and wrote out the four checks (dated April 18), which Defendant put
“in his top right-hand drawer,” rather than giving them to a cashier to cash. R., Vol.
VII at 1763. He further testified that they discussed that the checks would be cashed
after he received money from the Bluejay loan’s first draw.
Of course, if loan money is being used to pay off other debt and to secure the
Bluejay CD, it is not going toward buying lumber for the construction project. As
Duncan put it in an email to the Big D and Bluejay owners on April 17, this plan was
untenable and hardly appeared to serve his personal interests: “Boy I am excited
about this, I get 1350000.00 for a lumber draw, and it costs me $ 1389950.00 in
checks. I lose $ 39950, just to get a lumber draw, wow, what a deal. Then somehow I
have to ship 1350000.00 worth of lumber that I don’t have any money to pay for, I
love University national bank. . . .” R., Vol. XIII at 3173.13
Defendant cashed Duncan’s four checks (which were in Defendant’s
possession) after the first draw was disbursed—with $1.225 million wired to an
account at US Bank in the name of Schmidt Builders, which then wired that sum to
Duncan’s personal account at Commerce Bank and Trust. Duncan testified that he
was “concerned about that large amount of money going into Schmidt Builders
Supply and then me having to take it out of Schmidt Builders Supply into my
13
The lumber payment—which was ultimately $1.225 million—was not
enough to cover the four checks. The difference came from Larkin who, at
Defendant’s urging, took out a $500,000 loan that was used for Duncan to buy an
interest in Big D and pay for expenses like this.
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personal account,” but that Defendant told him that “[i]t just had to be done that
way.” R., Vol. VII at 1779.
During deposition testimony, Defendant testified that these transactions were
arranged to all happen at the same time:
[W]e were funding on the loan and simultaneously advancing money on the
construction draw all at the same time, so that this construction draw
request could be paid to Big D Construction. Big D Construction could then
pay the people that are on this draw[,] which one of those is Schmidt
Builders. They would wire out the funds to Schmidt Builders, and, then,
John Duncan was going to borrow the money from Schmidt Builders. He
was going to use those funds then to help take care of the . . . [the] CDs,
payoffs or whatever.
Ex. 445-L. After this testimony was introduced at trial, Duncan testified that he was
not borrowing any money from Schmidt Builders.
To put the lumber “sale” in context, the following transactions occurred on
April 28–29: (1) The Bluejay loan closed on April 28. (2) Also on April 28, the $1.5
million CD required as collateral for the Bluejay loan was funded through a $1.5
million loan to Duncan disbursed on that date. The $1.5 million CD was also
collateral for the $1.5 million loan to Duncan. (3) The only collateral for the $1.5
million loan to Duncan that was not also collateral for other loans was a $750,000
CD in Duncan’s name, which was funded from the first draw on the Bluejay loan via
the sham $1.225 million sale of lumber by Schmidt Builders. (4) The remaining
$500,000 plus received by Duncan from the sham sale went to pay down other loans
at UNB, including UNB’s mortgage on the Quinton Point land, which we will discuss
further below.
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Why these transactions were structured precisely as they were is unclear14; but
it was certainly not because Defendant wished the financial arrangement to be
transparent. A jury could conclude that Defendant intentionally misrepresented that
Schmidt Builders had purchased and was owed money for over $1.2 million worth of
lumber, thereby enabling him to direct money toward paying down loans and funding
the Bluejay loan collateral.15
The other CD allegedly created on April 11 to secure the Bluejay loan was for
$205,000. It, too, was created on April 28 and ultimately funded in significant part by
money from the first draw. The $243,252 sent to Big D from the first draw was
remitted to Freeman’s personal account, from which $66,988 was used toward
funding the CD. The balance of the $205,000 came from adding an additional sum of
$50,000 to a UNB loan to Freeman that had been extended multiple times (although
hardly any of it had been paid down in the three years prior) and from a March 2008
loan from Oehlert to Big D that was supposed to be used for other purposes. These
14
We note, however, that the $1.5 million loan to Duncan (used to purchase
the CD required as collateral for the Bluejay loan) would apparently have exceeded
his lending limit absent the use of the sham lumber draw to reduce his loan
indebtedness to UNB and to purchase the $750,000 CD used as collateral for the $1.5
million loan.
15
Defendant argues that Duncan did not get more money than he was owed
for the lumber because once he started actually shipping (different) lumber to the
project, his invoices were not paid. Defendant told Duncan, “That line item has
already been paid and there is no available funds to pay for any additional lumber.”
R., Vol. VII at 1788. But that argument misses the point. The purpose of the sham
sale was to get funds immediately to create the collateral required for the Bluejay
loan—funds that could not be obtained through any legitimate transaction. And, as
discussed later, had the participant banks known what was going on, they would not
have participated in the Bluejay loan.
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debts incurred by Freeman and Big D were not disclosed in any financial statement
provided to the participant banks.
The third piece of collateral was a mortgage on the land for the Quinton Point
development. According to the title insurer’s Commitment for Title Insurance, dated
March 12, there were three outstanding mortgages on the land that “need[ed] to be
satisfied or released prior to closing,” R., Vol. XII at 2867: (1) a mortgage held by
Stonehouse Rentals in the original amount of $91,849, (2) a UNB mortgage in the
original amount of $360,000, and (3) a mortgage held by AWM Real Estate Fund in
the original amount of $368,500. The Stonehouse Rentals mortgage was satisfied by
funds from the portion of the Bluejay first draw that was remitted to Freeman on
April 28. The mortgage release was filed on April 29.
The UNB mortgage was partially satisfied by a $250,000 check signed by
Duncan on April 18 but kept in Defendant’s drawer until Duncan received the money
from the sham lumber sale when the Bluejay loan closed. For reasons that are not
clear from the record, the release of the UNB mortgage was not signed or filed until
July 2008. Finally, the owner of AWM signed a release of mortgage on April 28 after
the borrowers convinced him to accept as a replacement a second mortgage (behind
UNB) on another property. (Earlier that day, Defendant had emailed Fagan to “put
the heat on” the owner. R., Vol. XIII at 3201.) The release was filed on April 29.
Agent Schmidt testified that there was no source of “cash equity from the
Bluejay borrowers in the Bluejay project that did not come from either loans or the
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first draw” of the Bluejay loan. R., Vol. VIII at 1942. This was not what the victim
banks wanted or expected.
With respect to the CDs, Heid of First Option Bank characterized Defendant’s
representation that UNB had two CDs on April 11, when it did not, as “my definition
of fraud.” R., Vol. III at 703. Brownback of Citizens State Bank and Trust testified
that “you can’t pledge something that doesn’t exist.” R., Vol. VIII at 2031. He said
that there was “no chance” his bank would have participated if it had known there
was “no actual money in the CDs” on April 11 (the purported date of the CDs and
security agreements pledging them as collateral) or on April 17 (when the
participating banks signed on to the loan). R., Vol. VIII at 2031; see also R., Vol. V
at 1258 (Peoples State Bank also would not have participated); R., Vol. III at 703–04
(Heid testimony that Duncan’s $1.5 million increase in debt to fund the CD should
have been disclosed). Walsh testified that “it would have been a big red flag” had
Lyndon State Bank known the CDs were not in existence when they signed the loan
and that he would have expected Defendant to disclose if the CDs were being
generated by loan money. R., Vol. VIII at 1899. He explained that when proceeds
from the subject loan itself are used to fund collateral, that “reduces the value of our
overall collateral and security on the matter and . . . it’s not a loan to fund the CD,
it’s a loan to build an apartment complex.” Id. at 1900.
Representatives from the victim banks also testified that they were deceived by
the representations about the land being free and clear. Brownback testified that
Citizens State Bank and Trust would “[a]bsolutely not” have participated if it had
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known there were liens on the land that the borrowers could only clear with money
from the Bluejay loan itself. R., Vol. III at 2025. As he put it, it was important to
have “the bare land come to the project from the borrowers free of liens because that
was . . . part of their down payment or . . . equity input. If it came from our loan, then
we made the down payment.” R., Vol. III at 2029. Walsh of Lyndon State Bank
echoed Brownback’s testimony: using loan money to clear liens “lowers the amount
of overall collateral because some of it is used to pay other creditors. And we’re
assuming that the collateral is securing our loan, not [] paying back others.” R., Vol.
VIII at 1898–99. Heid of First Option Bank stressed the importance of the free-and-
clear commitment to his decision: “[I]f this is part of your down payment, you’re
looking for your project to be as it’s stated. Free and clear is down payment money,
so it’s part of that 15 percent that we were supposed to have for this loan. Also, if
there’s other mortgages or other indebtedness, that means there’s more leverage, so
. . . you’ve got to make sure you disclose that properly.” R., Vol. VIII at 686–87. He
would have therefore expected the Offering Package to “state[] . . . that there is a
previous mortgage that’s being paid off . . . . [and] where those funds were coming
from.” R., Vol. VIII at 687; see also R., Vol. V at 1252–53 (testimony of Whelchel
that Peoples State Bank would not have participated if it had known the land was
encumbered and loan funds were being used to satisfy those mortgages). None of the
bank representatives backed off during cross-examination from this testimony
regarding the collateral.
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In light of the testimony by the bankers, the jury could reasonably infer that
Defendant, as a banker with substantial experience and holding an office of
substantial responsibility, knew that other banks would not participate in the loan if
they were fully informed about what he knew. From this perspective, the jury could
reject Defendant’s arguments that the prosecution was quibbling about technical
defects that were consistent with his limited obligations as the lead banker.
Defendant’s other attempts at defending his failures to disclose could also be
reasonably rejected by the jury. First, Defendant maintains that Ellis and Gaines at
BBOK understood that “the loan closing, lien clearings, CD funding, and first draw
were timed to close simultaneously” and that he is not responsible if BBOK made
misrepresentations to the contrary. Aplt. Br. at 32. He notes that UNB’s Loan
Statement represented only that the borrowers “will bring the land free and clear of
any debt,” R., Vol. XII at 2887 (emphasis added), which they eventually did, and the
“loan documents imposed no . . . prohibition” on using loan funds to clear the liens,
Aplt. Br. at 16.
But as testimony by the participating bankers makes abundantly clear,
pledging free-and-clear land as collateral means that it will be clear before closing
and funding. And Defendant points to no evidence that either Ellis or Gaines
understood that the mortgages could not be fully paid without using proceeds from
the first draw. Although emails between Defendant and Ellis indicate that Ellis knew
the liens had not been cleared as of April 16, 2008 (the day before the participants
signed), and Gaines testified that BBOK knew the land had not yet been cleared even
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after the participants signed, the ultimate deadline was that the liens be released
before closing. Indeed, the title insurance commitment submitted by Defendant to
BBOK states that the three liens “need to be satisfied or released prior to closing.”
R., Vol. XII at 2867. And Gaines testified that bringing the land free and clear “was a
condition of funding.” R., Vol. VII at 1638. Although she had occasionally seen first
draws being used to clear up liens, such an arrangement would be “disclosed and
fully understood by the lenders, how the loan would fund and what the funds were
for.” R., Vol. VII at 1672–73. Here, there is no evidence that Defendant
communicated his intent to pay off some of the outstanding mortgages with funds
from the first draw. On the contrary, the jury could infer that Defendant employed
complex arrangements to obscure that what was really going on was the use of loan
proceeds to make mortgage payments. Thus, a jury could easily have decided that
Defendant intentionally misled both BBOK and the participants to believe that the
land would be (and was) clear before closing.
Defendant also claims that “powerful evidence introduced and sponsored by
the Government definitively proved that Gregory gave Ellis and BBOK the full story
on the CDs’ funding and the entire closing process.” Aplt. Br. at 31–32. But this is
claptrap. The evidence referred to is merely deposition testimony of Defendant in
earlier civil proceedings. As the government notes, it never endorsed the truth of
everything Defendant said in his testimony, which it offered into evidence only to
show “Gregory’s involvement with BBOK, and his knowledge and intent to defraud.”
Aplee. Br. at 41. Defendant does not add to the credibility of his arguments by
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suggesting that the government in any way endorsed or sponsored the truth of
Defendant’s self-serving deposition testimony.
Defendant further argues that the participant banks were not deceived about
the CDs because the documents produced at closing included a computer screenshot
showing that the CDs were not created until April 28. But that evidence merely
presented a question for the jury’s consideration. The jury could properly infer that in
light of the prior documentation showing the CDs were created on April 11, any
banker seeing the screenshot could easily, and reasonably, have overlooked a line
entry on a printout that looked routine. Indeed, the only person who admittedly saw
the computer screenshot at the closing, Gaines from BBOK, testified that she did not
pay attention to anything other than the amount. After all, she had previously seen
copies of the original documents dated April 11. Nor would an entry showing a date
of creation on April 28 have disclosed to the participants that the Bluejay loan money
and other loan funds were being used to make those CDs possible. The jury could
properly find that once Defendant had fraudulently induced the participating banks to
commit to their loans, a last-minute “correction” in a buried line of an obscure
document amid a host of paperwork could not “cure” his fraud.
Moreover, Defendant cannot escape responsibility for failing to disclose
important information to the participating banks by blaming BBOK. BBOK obtained
its information about the borrowers and their transactions with UNB from UNB, and
testimony strongly indicated that anything of importance (except paperwork
transfers) came from Defendant. Also, the testimony by Fagan and Duncan showed
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what a great interest Defendant took in trying to keep the borrowers afloat and to
assure the Bluejay loan would be accomplished. The jury could readily infer that
Defendant was fully aware of and approved—indeed, caused—every disclosure to the
participating banks and knew that they would be very interested in the undisclosed
matters that contradicted representations in the Offering Package and participation
agreements. In particular, it was Defendant’s own Loan Statement, to which BBOK
refers the participants on the very first page of the Offering Package, that represented
the loan as one of average risk due to “good collateral values and the financial
strength of the borrowers individually and collectively”—although Defendant was
intimately familiar with the borrowers’ past-due debt and their inability to come up
with the required cash or collateral. R., Vol. XII at 2888.16 And the jury could easily
infer that Defendant must have been the source of the statement, which Defendant
knew to be untrue, that Freeman would soon be receiving $4 million from Junction
City for the Sutter developments.
16
The jury could also reasonably reject Defendant’s attempts to characterize
UNB’s Loan Statement as “Bartlow’s independent” work with which the Defendant
merely agreed. Aplt. Br. at 34–35. Bartlow testified that Defendant supplied the
information underlying the Loan Statement—indeed, that he “would just work with
the data that the loan officer provided,” R., Vol. VII at 1555; that Defendant
reviewed the Loan Statement after Bartlow completed it; and that typically the loan
officer would determine the risk rating and then discuss it with Bartlow. A reasonable
jury could conclude that Defendant directed Bartlow’s work and was fully aware of
any misrepresentations. This is an especially reasonable inference given that Bluejay
was a new entity with no borrowing history of its own, and as loan officer on nearly
all of the owners’ UNB loans, Defendant had superior knowledge of the various
accounts and histories.
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In addition, Defendant effectively warranted that there was no adverse
information to report when he signed the Participation Agreement with BBOK (on
whichever date he signed), which stated that UNB “has no actual knowledge, nor
made any misrepresentation of fact to Purchasing Bank [BBOK], regarding any
material adverse credit experience with Borrower.” R., Vol. XI at 2630. Although, as
Defendant notes, breach of this provision does not in itself prove fraud, his
confirmation that he was not withholding adverse information speaks to his
knowledge that BBOK and the participants relied on this information being disclosed
and to his fraudulent intent in withholding it. It would have been reasonable for the
jury to infer that either Defendant was responsible for the nondisclosure or that he
intentionally failed to correct the error.
The jury could also consider the actions Defendant took to conceal the
borrowers’ true financial position. To create the appearance that the borrowers were
taking care of their debts to UNB, he granted numerous renewals and extensions of
past-due loans that went unreported—even after UNB submitted the loan to BBOK
and BBOK solicited participant banks. Of particular import is Defendant’s arranging
for the Oehlerts to assume an $842,000 UNB loan to Big D that was 100 days past
due in March 2008 and could not be renewed because of opposition by a participating
bank. The borrowers and Oehlert met with Defendant in his office to discuss this
assumption and the borrowers committed to Oehlert that they would continue to
make the payments on the loan. BBOK and the participants were kept in the dark
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about the recent inability to pay off the large loan to UNB and the borrowers’
obligation to Oehlert to make the payments on his $842,000 loan.
Perhaps most blatant was the misrepresentation that the CDs for $1.5 million
and $205,000 at UNB were available as collateral on April 11, 2008. Defendant
signed phony documents describing the CDs, referencing their account numbers, and
creating security agreements dated April 11. Yet Defendant needed to make new
loans and take money from the first draw on the Bluejay loan (“justified” by a phony
lumber sale) to fund those CDs (directly and indirectly). Why go through such
machinations if everyone understood (or did not care) that the funding for the CDs
was to come out of loan proceeds? Why not straightforwardly create the necessary
checks or fund transfers directly out of the loan proceeds?
Finally, need we say more about Defendant’s sham lumber sale? If nothing
else, the jury could properly infer from his actions that he possessed the requisite
fraudulent intent when he deceived his fellow bankers.
In sum, there was no lack of evidence that Defendant created (caused) and
engaged in a scheme to defraud the victim banks into participating in the Bluejay
loan.
B. Making False Bank Entries
Defendant was also convicted on two counts of making false bank entries. See
18 U.S.C. § 1005. To prove a violation of § 1005, the government must prove that
“(1) defendant made a false entry in bank records, caused it to be made, or aided and
abetted its entry; (2) defendant knew the entry was false when it was made; and
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(3) defendant intended that the entry injure or deceive a bank or public official.”
United States v. Gallant, 537 F.3d 1202, 1227 (10th Cir. 2008) (internal quotation
marks omitted).
The basis for the government’s false-bank-entry charges was Defendant’s
creation of security agreements pledging nonexistent CDs at UNB as collateral for
the Bluejay loan. First, it is undisputed (1) that Defendant created certificates,
collateral receipts, and security agreements dated April 11 representing that the
borrowers had $1.5 million and $205,000 in CDs at UNB on April 11, 2008; and
(2) that those CDs were not actually created until April 28, 2008—and funded in part
with proceeds from the Bluejay loan. The second and third elements of the offenses
are established by the same evidence supporting Defendant’s bank-fraud convictions
based on misrepresentations about the CDs and related documents, which were
referenced in all the participation agreements. A reasonable jury could conclude that
Defendant knew that the banks would not have participated if they had known that
the borrowers did not have the requisite funds on deposit at UNB, and that he created
the above phony documents to keep the participant banks from knowing the truth.
Regarding this first element, Defendant argues that these documents were “not
false ‘entries’ in UNB’s records,” because the government did not show that they
were actually entered into “UNB’s books of account” before the loan closed. Aplt.
Br. at 39. But the statute itself prohibits false entries in “any book, report, or
statement of such bank, company, branch, agency, or organization.” 18 U.S.C. § 1005(emphasis added). Defendant cites no authority that limits § 1005 violations to entries
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in books of account, and courts have found a great variety of records actionable. See,
e.g., United States v. Foster, 566 F.2d 1045, 1052 (6th Cir. 1977) (interoffice memo
intended to deceive bank directors constitutes false entry; stating that no authority
supports the argument that false entries are only those “contained in formal bank
financial accounting records”); United States v. Flanders, 491 F.3d 1197, 1205, 1214
(10th Cir. 2007) (unofficial board minutes altered to omit conditions for loan
approval can constitute false entry); see also John K. Villa, Banking Crimes: Fraud,
Money Laundering and Embezzlement § 3:37 (2021).
Next, Defendant turns to the purpose of § 1005, which is to “‘give assurance
that upon an inspection of a bank, public officers and others would discover in its
books of account a picture of its true condition.’”17 Aplt. Br. at 38 (quoting United
States v. Darby, 289 U.S. 224, 226 (1933)). He maintains that “a bank examiner
inspecting UNB’s records on or after April 28 would see the true picture of the
bank’s books and records” and the fact that the agreements and CDs “showed dates
of April 11, 2008 would not have obscured the true picture.” Aplt. Br. at 39. But as
the government points out: “Nothing in Section 1005 exempts a defendant’s false
bank entries just because some other, later entries—made after the defendant has
17
Relatedly, he maintains that he could not have made false entries with the
intent to deceive the victim banks because “there was no evidence that the victim
banks had any right to inspect UNB’s records.” Aplt. Br. at 40. But § 1005 prohibits
false bank entries made “with intent to injure or defraud such bank, company, branch,
agency, or organization, or any other company, body politic or corporate, or any
individual person.” 18 U.S.C. § 1005 (emphasis added). The victims (such as the
banks here) need not be only those with a right to inspect a bank’s records.
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successfully defrauded his victims—assertedly ameliorate the false entries’
misrepresentations.” Aplee. Br. at 49–50; see Phillips v. United States, 406 F.2d 599,
601 (10th Cir. 1969) (“[T]he making of a false entry in the books of a bank with
intent to deceive is all that is necessary to bring the act within the meaning of the
statute, and the fact that its falsity may be exposed by an examination of other books
of account, does not render it any the less a false entry made with intent to deceive.”
(internal quotation marks omitted)). The point is that the false entries gave a false
picture of circumstances before closing, which was all Defendant needed.
A reasonable jury could find beyond a reasonable doubt that Defendant made
false entries in UNB’s records with the intent to deceive banks into participating in
the loan.
III. PROSECUTORIAL MISCONDUCT
Defendant complains that the district court improperly denied his motion for
new trial based on prosecutorial misconduct during closing argument. In arguing that
none of the victim banks would have participated in the Bluejay loan had they known
the truth, the prosecutor enacted a fictitious presentation to the banks by Defendant
during which Defendant discussed information not previously disclosed to them.
Defendant contends that this dramatization was “grossly misleading” because it was
“based on facts not in evidence.” Aplt. Br. at 25. We disagree. The prosecutor
properly used a dramatic device to persuade the jury of an essential element of the
offense. In doing so he did not go beyond reasonable inferences from the evidence at
trial.
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A. General Principles
The form of closing is a matter of some importance. There is no question that a
closing argument may deny the opposing party a fair trial. But in the American
tradition a closing argument can be a quintessential example of the art of persuasion.
That tradition is a great one, and courts should be cautious about imposing too
stringent restrictions. Few human endeavors are more fraught with difficulty than
persuading another person of the rightness of one’s view, particularly when time or
space is limited. Finding the perfect note to ring is a product of reflection, insight,
empathy, and luck. Justice will not be served if we are too quick to constrain the
imagination of litigators.
One could point to myriad examples in life and literature of imaginative
arguments that carried the day. We will confine ourselves to only one, which
resembles what happened at Defendant’s trial. Not that long ago (and perhaps still),
more trial attorneys looked for guidance in Professor James McElhaney’s columns in
the Litigation journal and his books than any other source. To illustrate the difference
that creativity can make in the effectiveness of closing argument, he described what
happened at an American Bar Association convention when a mock prosecution was
tried twice to two different juries of legal assistants. The evidence presented was the
same in both trials. Bonnie Lynch had put up Frank Adams in her apartment for a
weekend and then drove him to a bus station across the state line. Adams was a
fugitive from justice. The only issue was whether Lynch knew that about him. Her
friend Jesse Nolan had asked her to accommodate Adams. Testifying under a grant of
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immunity, Nolan said that he had called Lynch and told her “all about” Adams.
James W. McElhaney, Trial Notebook 699 (4th ed. 2005). The verdict at the first trial
was 7-5 for conviction. Defense attorney John Burgess thought he could do better,
but he changed only the closing argument. At the first trial he had emphasized how
the grant of immunity gave Nolan an incentive to lie. The second time around he
tried something more dramatic. He reenacted the telephone conversation between
Bonnie Lynch and her accuser, Jesse Nolan, using an imaginary telephone in each
hand and changing his voice to fit either Bonnie or Jesse:
“Hello?”
“Hello, Bonnie?”
“Yes. Who is this, please?”
“This is Jesse—Jesse Nolan.”
“Oh, hi, Jess. How are you?”
“I’m fine. Say, Bonnie, I wonder if you might do me a favor.”
“I will if I can. What is it, Jesse?”
“I have this friend here from out of town, and I have to find a place
for him to stay. I wonder if you might put him up for the weekend?”
“Gee, Jesse, I don’t know. There is just me and Gretchen living
here—I am not sure.”
“Oh, he wouldn’t be any trouble. He’s a real nice guy.”
“I’m really not sure, Jesse. Who is this person, anyway?”
“His name is Frank Adams, and he is an old friend of mine.”
“Oh, Jesse, I don’t think so . . .”
“Bonnie, don’t worry. He is a real good guy. He is a bag man for
the mob in Nashville. There is a federal fugitive warrant out for his
arrest, and he is on his way to Dallas to bribe a local official.”
“Well, if that’s the case, send him right over.”
Id. at 700. This time, the jury burst out laughing and returned a unanimous verdict of
not guilty after five minutes of deliberation.
The law does not prohibit such rhetorical devices. “Arguments may be
forceful, colorful, or dramatic, without constituting reversible error. Counsel may
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resort to poetry, cite history, fiction, personal experiences, anecdotes, biblical stories,
or tell jokes.” Whittenburg v. Werner Enters. Inc., 561 F.3d 1122, 1133 (10th Cir.
2009) (Gorsuch, J.) (citations and internal quotation marks omitted)). And “so long
as it is supported by the facts and circumstances properly in evidence, [argument]
may be couched in vigorous and pungent phrases, embellished with oratorical
flourishes, and illuminated by pertinent illustrations.” J. Alexander Tanford, Closing
Argument Procedure, 10 Am. J. Trial Advoc. 47, 52 (1986) (internal quotation marks
omitted); see also United States v. Hammers, 942 F.3d 1001, 1016 (10th Cir. 2019)
(Prosecutors are “entitled to a reasonable amount of latitude in drawing inferences
from the evidence during closing arguments.” (internal quotation marks omitted));
United States v. Young, 955 F.2d 99, 109 (1st Cir. 1992) (Breyer, C.J.) (prosecutor’s
“simplified” hypotheticals starting with straightforward embezzlement and building
up to a more complex scheme like the one at issue in the case “did not surpass outer
limit of permissible argument” despite defendant’s contention that the jury was
invited to convict based on “inflammatory hypotheticals” rather than the facts of the
case (internal quotation marks omitted)).
Of course, there are limits. Some are constitutional, such as the prohibition on
commenting on a defendant’s failure to testify. Others concern more general
conceptions of fairness. McElhaney has listed the following “basic rules of final
argument”: Counsel “may not misstate the evidence or the law,” “argue facts that are
not in evidence,” “state [their] personal belief in the justice of [their] cause,”
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“personally vouch for the credibility of any witness,” “appeal to passion or
prejudice,” or “urge an irrelevant use of evidence.” McElhaney, supra, at 669.
Absent specific constitutional command, “improper remarks require reversal
. . . only if the remarks so infected the trial with unfairness as to make the resulting
conviction a denial of due process.” Bland v. Sirmons, 459 F.3d 999, 1024 (10th Cir.
2006) (internal quotation marks omitted). We place the remarks in the context of the
entire proceeding, including the strength of the evidence against the defendant and
cautionary steps taken by the court. See id.; see also United States v. Christy, 916
F.3d 814, 824 (10th Cir. 2019). “The ultimate question is whether the jury was able
to fairly judge the evidence in light of the prosecutors’ conduct.” Bland, 459 F.3d at
1024.
B. The Government’s Closing Argument
Where does the closing argument in this case fit in? The theory of the
prosecution was that Defendant had deceived the victim banks by providing
misleading information. As with any claim of fraud or deceit, the jury must decide
whether a false or misleading statement was material. It must consider a
counterfactual: would an alleged victim have likely acted differently if (contrary to
fact) the victim had been provided full and accurate information. One tried-and-true
technique for persuading the jury would have been simply to argue how important the
undisclosed information would be to a conscientious banker. The prosecution,
however, decided on a more dramatic approach—asking the jury to imagine what
would have happened had Defendant been candid. After asserting that “[n]o bank
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would have given money to these borrowers under these circumstances if they had
known the truth about [the loan],” R., Vol. IX at 2135, the prosecutor asked the jury
to imagine a meeting of Defendant with the victim banks (a meeting that everyone
knew had never occurred) on April 17, 2008 (before the bankers committed to
participating in the Bluejay loan) at which Defendant told the bankers a number of
things about which they had not been informed: “[I]magine with me a boardroom
. . . and in this boardroom are [representatives of the] banks who gave money in this
loan. [A]lso . . . imagine that instead of having to rely on the paper documents that
they were given, that [Defendant] has the opportunity to pitch this loan to them
directly.” Id. Pretending to be Defendant giving his pitch to the bankers, the
prosecutor said such things as:
[I] want to be honest, so I have to tell you a few other things too. The 15
percent cash equity down payment that BBOK required the borrowers to
come up with really won’t be coming from their own cash reserves or
property.
The fact is I’ve signed loan documents with Duncan to loan him $1.5
million to put into a CD. He has no way of paying that loan money back
because he’s highly leveraged, and he has no assets that he can sell to make
that money.
But we need the money to make up the 15 percent, so that’s what I’m going
to do.
Now, I know that your documents already refer to the $1.5 million CD, but
right now it has no money in it. It’s worthless. I had to lead you on a bit
there, but I’ve told Mr. Duncan to write me a $750,000 check to act as
collateral for that loan. He didn’t have the money in his account to cover
that check, so I couldn’t fund the CD.
He and I both knew that when I told him to write the check, that he didn’t
have the money, so I just put it in my desk drawer until I know that he has
the money.
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Id. at 2150–51. What the prosecution is asking the jury to do is to visualize the
counterfactual situation that it would have to consider anyway—especially when the
defense contended that there was nothing irregular about how Defendant and the
borrowers arranged to meet the loan conditions, such as by using loan proceeds to
fund the CDs pledged as collateral.
We leave to others to decide whether the approach taken by the prosecution
was a good idea or was well executed at Defendant’s trial. What we decide is merely
that there was nothing improper in this approach.
In district court, defense counsel complained about the hypothetical from the outset.
He objected that the prosecutor was “coming up with hypotheticals. Closing argument is
supposed to be based on the evidence from the trial. He’s making stuff up . . . .” Id. at
2136. At bench conferences he argued: (1) “[C]losing argument has to be based on the
evidence from the trial.” Id. at 2138. (2) “The prosecutor is saying that [Defendant] said
things that there’s no evidence about.” Id. at 2141. And (3):
[H]e’s not talking about the evidence of the case. He’s not talking about the
truth of the case. [The prosecutor] is making up whatever he wants to say.
He is telling the jury that [Defendant] would say these things. That’s not
true. He’s creating a complete farcical, fantasy world of information . . . .
He’s acting like [Defendant] actually said these things. There’s no evidence
of that. . . . [The prosecutor] has told the jury that this conversation is going
on for all of the participant banks in some meeting that never took place.
Id. at 2141–42. In response, the prosecutor said: “[M]y point is [Defendant] did
not say these things. That’s the whole point. He didn’t say these things. I’m going
to make the very point [defense counsel] just said.” Id. at 2142.
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After defense counsel’s first objection, the court told the jury: “Again, jury
members, . . . closing arguments are what the attorneys believe in regards to the
evidence in this case. It’s not evidence.” Id. at 2136. After overruling a second and
third objection, the court recognized defendant’s continuing objection and asked
(at the bench) that counsel refrain from interrupting with the same objection on the
same grounds. The court then instructed the jury as follows:
Again, jury members, something I mentioned at the beginning of the
closing argument, and I’ll repeat [] this time is what the attorneys say not
only at this point of our trial, but at any point, their comments or their
statements or, in this case, their arguments is not evidence.
The evidence is only what was presented to you through the witnesses’
testimony and the exhibits that were admitted or stipulations. That’s the
evidence that you must make your decision on.
[C]losing arguments are there for the attorneys to argue in regards to what
they believe the evidence has shown or in this case what counsel identified
is as a contrast or analogy or hypothetical, what they believe in regards to
that as it relates to the evidence. . . . Please keep that in mind.
Id. at 2146–47.
The district court properly rejected the objection. The prosecution could have
gone through all the things that Defendant had failed to disclose about the loan and
then argued that the participant banks would have backed out if they had known that
information. He merely dramatized the point by asking the jurors to imagine (as part
of the counterfactual) how the participant bankers would have reacted had Defendant
personally informed them of the true state of affairs. Not only did the prosecutor
make clear that Defendant had not made the statements, his whole point was that
Defendant had not disclosed the information. In Abela v. Martin, 380 F.3d 915, 929–
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30 (6th Cir. 2004), the prosecutor presented a hypothetical conversation between the
defendant and a friend before they returned to a house where they had just been in a
fight. It was an “attempt to explain why the two might have returned to the party after
being told to leave” that illustrated the government’s theory of the case and
challenged the defendant’s theory of self-defense. Id. at 929. The appellate court
said:
We would be highly concerned if the prosecutor presented the conversation
as factual. But, here, the prosecutor prefaced this part of his argument by
advising the jury: “and exactly what was said probably we’ll never know
but probably went something like this . . . .” Because of this preface, we are
persuaded that the jury would not have been misled into believing that the
prosecutor was quoting from an actual conversation, but that he was rather
presenting beliefs he would have the jury infer from the evidence presented
at trial.
Id. at 930. Here there was even less danger that the jury would think the prosecutor was
reciting evidence, because the prosecutor emphasized that Defendant had not made the
statements.
Nor did the prosecutor suggest that Defendant should have communicated
directly with the victim banks. The uncontested evidence at trial was that BBOK
managed communications with the participants, and the prosecutor prefaced his
dramatization by asking the jury to imagine that, rather than the participants relying
on “the paper documents,” Defendant “has the opportunity to” speak with the banks
directly. R., Vol. IX at 2135 (emphasis added). (The prosecution theory, for which
there was more than ample evidence, was that BBOK depended on Defendant for
accurate information about the borrowers and transactions at UNB, but Defendant
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provided BBOK with false, misleading, and incomplete information.) We see nothing
unfair in the prosecutor’s approach.
It would be something else entirely if the prosecutor had Defendant telling the
participant bankers things for which there was no evidence—say, the prosecutor’s
imagined meeting included a statement by Defendant that he had been bribed by one
of the borrowers. During trial, however, defense counsel did not object on that
ground to any of the closing argument by the prosecution; defense counsel never
pointed to a specific statement in the hypothetical speech as being unsupported by
evidence at trial. Arguing that there is no evidence that Defendant made the
hypothetical statements recited in closing argument is not the same as arguing that
the evidence fails to support the underlying substance of those statements. In his
briefs in this court Defendant points to a few statements by the prosecutor that he
contends were not supported by evidence at trial, such as Defendant’s fear that he
would lose his bonus and perhaps his job if he could not clean up the loans for the
Sutter developments or that UNB itself could have trouble with federal regulators
because of his manipulation of those loans. In our view, however, those comments
were reasonable inferences from the evidence (would it be unreasonable to infer that
Defendant would have been fired and federal bank regulators would have been upset
if the bank had lost millions of dollars on the Sutter loans and Defendant’s cover-up
of the problem loans had been unearthed?), and were certainly not obviously
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improper.18
Defendant tries to compare the prosecutor’s closing argument to the plaintiff’s
closing argument in Whittenburg, where we reversed a judgment because of
improprieties in the closing argument. 561 F.3d at 1127. But the only common
feature of the two closing arguments is that they conveyed a hypothetical
communication.
Whittenburg was a negligence case against a trucking company by a driver
who was seriously injured after he hit one of the defendant’s stalled trucks on a dark
road. See id. at 1124. During closing argument plaintiff’s counsel asked the jury to
imagine that the defendant delivered a letter to plaintiff’s children shortly after
plaintiff left the house the night of the accident. See id. The letter began: “That was
the last time you will ever see your dad as you now know him. You should let your
siblings know this.” Id. at 1125. Then the fictitious letter in effect confessed that
various actions by the defendant’s employees caused the accident and that they failed
18
“We review arguments not raised in district court for plain error.” United
States v. Piper, 839 F.3d 1261, 1265 (10th Cir. 2016); see United States v. Gonzalez-
Montoya, 161 F.3d 643, 650 (10th Cir. 1998) (reviewing for plain error when defense
counsel objected to statements in closing argument on different ground from what
was argued on appeal). “Under the plain error standard, [Defendant] must
demonstrate: (1) an error, (2) that is plain, meaning clear or obvious under current
law, (3) that affects substantial rights, and (4) that seriously affects the fairness,
integrity, or public reputation of judicial proceedings.” Piper, 839 F.3d at 1265–66.
Moreover, when, as here, “an appellant fails to preserve an issue and also fails to
make a plain-error argument on appeal, we ordinarily deem the issue waived (rather
than merely forfeited) and decline to review the issue at all—for plain error or
otherwise.” United States v. Leffler, 942 F.3d 1192, 1196 (10th Cir. 2019).
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to properly respond. See id. at 1125–26 (“Once stuck on the highway, our drivers will
ignore the law, and they will ignore our company procedures, and recklessly set a
trap for your dad.”). And it described in detail the physical pain the plaintiff was in
during and after the accident. See id. at 1126 (“[H]e has to endure the claustrophobic
remains of what’s left of his pickup for nearly two hours while rescue workers work
to free him . . . .”).
In addition, much of the letter was devoted to “vituperative attacks on
defendants and their counsel,” which “had no basis in evidence adduced at trial.” Id.
at 1129; see, e.g., id. at 1126–27 (“We will do everything in our power to convince
the jury that your dad was really not all that injured in the first place, and that your
dad is overreaching in trying to prove his damages. Of course, if none of that works,
our lawyers will accuse your dad of being a failure because his law firm used to have
20 members and now it only has five.” (brackets omitted)). The letter then admitted
that the defendant company improperly took the case to trial and was spending a lot
of money to “avoid full responsibility”; it also admitted that the defense trial strategy
involved ridiculing the plaintiff and “using smoke and mirrors and half truths.” Id. at
1126–27.
We stated: “We are compelled to reverse and remand for a new trial because of
pervasive and improper remarks by Mr. Whittenburg’s counsel in closing argument
to the jury. Counsel spent the bulk of his argument placing before the jury fictitious
admissions never uttered by defendants and launching vituperative and unprovoked
attacks on defendants and their counsel.” Id. at 1124.
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To be sure, in the case before us there was also no evidence that Defendant
ever said what was put in his mouth by the prosecutor at closing argument. But there
are two critical differences between the hypothetical “confessions” in this case and
Whittenburg. First, in Whittenburg “the content of this particular imagined letter
included a great many facts about Mr. Whittenburg’s children and [the trucking
company’s] conduct that lacked any basis in the evidence adduced at trial.” Id. at
1128. In contrast, in this case the evidence supported essentially everything that
Defendant hypothetically confessed. Second, there was no apparent purpose for
having the trucking company confess in the Whittenburg letter other than to suggest
its admission that it engaged in various wrongdoing. In this case, however, the whole
point of the hypothetical was that Defendant never admitted his concealment of
material facts—that is, he did not provide full disclosure to the victim banks of the
problems with the proposed loan. The prosecutor was arguing that Defendant should
have disclosed those matters and the loan would never have gone through if he had
done so. In short, the prosecutor was pointing out that the disclosures omitted by
Defendant were material. No juror could have misunderstood this point.
And there is at least one other important ground for distinguishing the two
cases. In this case there was nothing comparable in the prosecution’s closing
argument to the appeals to prejudice in the Whittenburg closing argument, such as the
attacks on the trucking company and its attorney for which there was no supporting
evidence in the record. See id. (“The permissible limits of closing argument were
exceeded in this case in two principal ways. First, counsel referred extensively to
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evidence not in the trial record. Second, without apparent provocation or basis in the
record for doing so, counsel flooded his argument with abusive references to his
opposing party and counsel.”); see also id. at 1129 (“The invented facts placed before
the jury were also plainly calculated to arouse its sympathy, evoking, as they did,
images of plaintiff’s children receiving for the first time news of their father’s
injuries, implicitly asking the jury to place themselves in the shoes of the children.”).
It is also worth noting that although in Whittenburg “the parties [fought]
considerably over the propriety of ever using an imaginary letter as a way to structure
a closing argument,” we said that “we need not resolve today an abstract debate over
the proper form of closing arguments.” Id. at 1128. The problem was the content. In
this case we see no problem with the content, which amounted to merely an argument
that the omitted disclosures were material.
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In short, we see no support in Whittenburg for Defendant’s challenge to the
closing argument by the prosecutor.19 The district court did not err in denying
Defendant’s motion for mistrial.
19
The parties agree that our standard of review of the closing argument is de
novo. They cite dicta in United States v. Anaya, 727 F.3d 1043, 1052 (10th Cir. 2013)
and United States v. Christy, 916 F.3d 814, 826 (10th Cir. 2019), which state that we
review overruled prosecutorial-misconduct objections de novo, whereas sustained
objections followed by mistrial or new-trial motions are reviewed for abuse of
discretion. Other authority, however, suggests that our review is for abuse of
discretion when an objection is overruled. See United States v. Harlow, 444 F.3d
1255, 1265 (10th Cir. 2006) (reviewing mistrial motion for abuse of discretion where
trial court failed to sustain objection); United States v. Broomfield, 201 F.3d 1270,
1276 (10th Cir. 2000) (court failed to sustain objection and denied motion for new
trial); United States v. Kravchuk, 335 F.3d 1147, 1153 (10th Cir. 2003) (denial of
simultaneous objection and motion for mistrial reviewed for abuse of discretion);
United States v. Gabaldon, 91 F.3d 91, 94 n.2 (10th Cir. 1996) (making no
distinction between overruled or sustained objections); see also United States v.
Taylor, 514 F.3d 1092, 1097 n.2 (10th Cir. 2008) (Gorsuch, J.) (“Our case law
requiring de novo review of the decision to overrule an objection to misconduct is
admittedly at odds with holdings of most of our sister circuits . . . .”). (There is no
difference between the two standards of review when the issue is purely one of law,
as when the closing argument is challenged for violating a constitutional command.
See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) (“A district court
would necessarily abuse its discretion if it based its ruling on an erroneous view of
the law . . . .”); see, e.g., United States v. Ivory, 532 F.3d 1095, 1100 (10th Cir. 2008)
(the Fifth Amendment ordinarily “forbids comment by the prosecution on the
accused’s silence” (ellipsis and internal quotation marks omitted)).)
In general, we would think that the proper standard is abuse of discretion,
because the trial court’s familiarity with the trial is a great advantage in assessing
whether a closing argument was fair. A trial judge, who “is present in the courtroom
throughout the proceedings, . . . is uniquely positioned to assess the prejudicial effect
of an improper argument in the context of the overall trial, as well as to fashion an
appropriately tailored remedy,” although appellate courts have the advantage of time
and “the opportunity to consider how individual cases fit in the context of a wider
stream of . . . precedent.” Whittenburg, 561 F.3d at 1128; see id. (“In this light, our
job is not to grade closing arguments, but it is to police the outer boundaries of
permissible argument.”). In this case, however, we need not choose the standard of
review because on de novo review we can reject Defendant’s challenge.
63