United States v. Riddle ( 1997 )

REVISED
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 95-20251
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
JOHN C. RIDDLE,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas
January 7, 1997
Before KING and HIGGINBOTHAM, Circuit Judges, and LAKE,* District
Judge.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
John C. Riddle appeals his convictions for bank fraud,
misapplication of bank funds, making false entries, and conspiracy.
Although he argues a variety of points of error, we limit our
discussion to the trial court’s evidentiary rulings. We are
persuaded that the cumulative and interactive effect of four
rulings requires that we reverse the judgment of conviction and
remand for a new trial.
*
District Judge for the Southern District of Texas, sitting by
designation.
I.
Riddle opened Texas National Bank–Post Oak on May 7, 1984. He
was chairman of the board and co-trustee of a voting trust that
controlled a majority of the shares. Because of unusually high
opening day deposits totaling around $38 million, the Office of the
Comptroller of the Currency (“OCC”) initiated an examination of
TNB–Post Oak only sixty days after the bank was launched. An OCC
inspector, Gary Meier, discovered that the bank’s purchases of five
$800,000 loan participations violated its legal lending limit.
Meier expressed to the bank his concern that it was imprudently
relying on repurchase agreements without inspecting the
creditworthiness of the entities that had promised to repurchase
the participations if they went bad. He explained to Riddle and
the bank’s board that OCC regulations required banks to review loan
participations as thoroughly as if the bank were initiating the
loan.
In March of 1985, ten months after opening TNB–Post Oak,
Riddle opened a second bank, Texas National Bank–Westheimer
("TNB–W"). The criminal charges at issue in this case arose out of
Riddle’s relations with this second bank. As chairman, Riddle held
approximately ten percent of the bank’s stock. As with TNB–Post
Oak, a voting trust named Riddle as co-trustee. Riddle was not an
officer, but he exercised control over various board members. The
board declared that Riddle was not an executive officer. But in
November of 1985, the OCC concluded that the board’s declaration
was ineffective because Riddle in fact controlled the bank’s
2
activities, including the activities of Victor C. Bane, the bank’s
president and loan officer.
The OCC inspected TNB–W in September of 1985 and found a
number of problems. Its loans-to-debt ratio was an unhealthy 105
percent. The most serious problem concerned loans to insiders. On
opening day, it granted a $400,000 unsecured loan to Riddle, which
immediately put the bank in violation of banking regulations as
well as its own policies. The next month, Riddle had Bane issue a
$415,000 letter of credit to Rick Dover, Riddle’s real estate
development partner, to satisfy the lender behind one of Riddle’s
commercial real estate projects. Dover did not have to post
collateral, and in exchange Riddle granted a 15 percent interest in
the project to Dover. According to the OCC, the bank failed to
keep proper documentation for transactions with businesses owned by
bank directors. A full twenty-five percent of the bank’s gross
loans went to insiders or companies related to insiders. The OCC
inspector discussed the loans-to-insiders violations with Riddle
and the board. His report listed loans to Riddle in particular as
problematic.
TNB–W lost money during its first six months. To remedy this,
the board decided to pursue a strategy suggested by Bane: the bank
would raise its interest rate on certificates of deposit to
generate short-term assets. The strategy worked as planned, and
between September 30, 1985, and December 31, 1985, TNB–W tripled
its assets. To pay the interest on these certificates, the board
resolved to purchase loan participations. Riddle suggested that
3
TNB–W turn to Vernon Savings & Loan, a thrift operated primarily by
Don Dixon, the chairman of Dondi Corporation, Vernon’s controlling
shareholder. Riddle had done personal business with Vernon and
Dixon in the past. He did not disclose to the board, however, that
he had a personal business interest in TNB–W’s purchase of
participations from Vernon.
In addition to opening banks, Riddle was involved in real
estate development. In September of 1984, Riddle and Dover formed
Hickory Creek Joint Venture to purchase a 1230-acre tract west of
Houston called Park Green. They signed a note for $40 million. In
the late spring of 1985, they bought an adjacent 230 acres with $13
million in financing. Vernon bought 35 percent of the first loan;
Western Savings and Loan bought the other 65 percent. Vernon and
Western also funded the second loan and took a pro rata profit
participation that would take effect upon sale of the property.
By the fall of 1985, Riddle was having cash-flow problems and
wanted to sell the Park Green property. Another Houston developer,
John Ballis, expressed interest in buying Park Green and proposed
swapping Park Green for a piece of land known as the Superior Oil
tract, which was located closer to downtown Houston and thus was
more desirable for development. Ballis had deposited $1 million to
obtain an option to purchase the Superior Oil tract before December
23, 1985. On September 24, Riddle and Dover signed a letter of
intent to purchase the Superior Oil tract from Ballis in exchange
for the Park Green property.
4
At the end of October of 1985, Riddle sought funding for the
Superior Oil deal from Vernon and Dixon. Dixon explained, however,
that regulators had imposed growth restrictions on Vernon and
suggested that Riddle find another lender to buy loan
participations from Vernon so that Vernon could finance Riddle’s
project. In October and November, Dixon and Riddle took a 3-week
European vacation, during which they explored ways to structure
transactions so that Vernon could fund the Superior Oil deal. At
a November meeting at Dixon’s office, Riddle suggested that Vernon
buy 30 percent of the $78 million loan that Western would issue for
the Superior Oil purchase. He explained that he would have TNB–W
buy $8.5 million in loan participations from Vernon. Woody Lemons,
Vernon’s president, expressed concern that this would violate bank
regulations governing loans to insiders. But Riddle nevertheless
went forward with his proposal to the TNB–W board that it buy loan
participations from Vernon. Riddle brought Bane to Dixon’s office
to work out the details of purchasing the loan participations.
At November and December meetings, Riddle and Bane urged the
TNB–W loan committee to purchase participations from Vernon.
TNB–W, however, did not have time to review the quality of the
loans, and Vernon did not include sufficient documentation to
support TNB–W’s purchase. As it turned out, Vernon’s loans were
delinquent: Vernon had been paying the interest itself in order to
make the loans appear sound.
Dixon and other Vernon officials were aware of Riddle’s scheme
and acted to see that TNB–W purchased enough participations to
5
allow Vernon to fund the Superior transaction. On December 4,
TNB–W’s loan committee recommended that TNB–W purchase seven
participations from Vernon. In connection with the loans, Vernon
issued unconditional buyback letters, which guaranteed that Vernon
would pay in case the borrowers defaulted. Both Vernon and TNB–W
hid these letters from regulators because, as far as the OCC was
concerned, they meant that Vernon had not really reduced its loan
portfolio after all. TNB–W’s board approved the purchases on
December 17. At the insistence of Riddle and Bane, the board also
approved the purchase of an additional $6 million in participations
from Vernon.
Facing the December 23 deadline, Ballis bought the Superior
Oil tract for $64 million on December 17. After forming the
Regents Park Limited Partnership, Riddle and Dover agreed to buy
the Superior Oil tract from Ballis for $63.1 million. The closing
took place on December 23, and Ballis bought the Park Green
property for $64.4 million. Vernon was to fund $23 million of the
$78 million loan that Riddle and Dover needed to finance the
Superior Oil purchase. But on December 24, Dixon told Riddle that
Vernon would not send the money until TNB–W sent the $6 million
that had been due the previous week for loan participation
purchases. Bane purchased an additional 21 participations from
Vernon on behalf of TNB–W without approval of the TNB–W board and
wired over $9 million to Vernon during the last week of December.
During that same week, Vernon wired $10.9 million to Western to buy
a participation in Western’s loan to Riddle and Dover.
6
Bill Plyler, a TNB–W executive vice president, was suspicious
of Riddle’s behavior and asked the OCC to audit TNB–W in late
December of 1985 or January of 1986. The OCC was especially
worried about the high concentration of participations purchased
from Vernon and TNB–W’s rapid growth from $10 million to $32
million over the course of three months. Several board members
confronted Riddle, who denied that his Superior loan from Vernon
had been contingent on TNB–W’s purchase of participations from
Vernon. In part as a result of the board’s discovery of Riddle’s
conduct, Bane resigned in January, and Plyler replaced him as
president. In the aftermath of Bane’s resignation, bank officials
discovered that Riddle had caused TNB–W to make a number of
imprudent loans for his own or his friends’ benefit. Plyler
insisted that Riddle write a letter to the OCC to explain TNB–W’s
decisions. Riddle complied, but the government ultimately
concluded that the letter contained a number of misrepresentations.
In April, an OCC examiner found that 76 percent of TNB–W’s
outstanding loans had become delinquent and recommended that the
bank be declared insolvent.
Riddle resigned as chairman on June 12, 1986. On November 13,
the OCC issued a cease-and-desist order for TNB–W to stop its
unsafe lending practices. After Meier conducted a May, 1987,
examination, the OCC declared insolvency on May 28 and appointed
the FDIC as receiver.
7
II.
A grand jury indicted Riddle and Bane on one count of bank
fraud under 18 U.S.C. § 1344, one count of misapplication of bank
funds under 18 U.S.C. § 656, three counts of making false entries
in violation of 18 U.S.C. § 1005, and one count of conspiracy in
violation of 18 U.S.C. § 371.
Gary Meier, the OCC examiner who prepared reports on TNB–Post
Oak in 1984 and on TNB–W in 1987, was one of the prosecution’s
primary witnesses at trial. Although he testified as a lay
witness, the prosecution elicited opinions that drew on his
expertise as a bank examiner. The court admitted all four bank
examinations under Fed. R. Evid. 803(8)(B) as public reports
prepared as required by law from observations of officials other
than law enforcement personnel. Meier read from these examinations
in spite of the fact that he was not involved in the 1985 and 1986
examinations. The court explained that Meier had personal
knowledge of the reports because he relied on them when he
conducted the 1987 examination. The court disagreed with defense
counsel’s contention that Meier was testifying as an expert.
According to the district court, Meier was a “hybrid lay witness”
who could offer explanations of the four relevant bank examinations
under the guise of lay opinion testimony. The court admitted his
statements about matters such as OCC policy and sound banking
practices under the rubric of Fed. R. Evid. 701.
To counter Meier’s testimony, the defense offered the
testimony of Stephen Huber, an expert in banking regulation who
8
teaches law at the University of Houston. After holding a proffer
hearing, however, the court barred Huber from testifying “based
primarily on Rule 403.” Huber had no personal contact with Riddle
or Bane, and the court found that his testimony consisted largely
of legal conclusions and duplicative explanations of banking
practices.
The court made a variety of other contested evidentiary
rulings. It admitted as exhibits a proffer letter and sworn
statement given by Dixon, who had been convicted and imprisoned for
bank fraud in his dealings with Vernon. The defense read portions
of these documents during cross-examination, and the court granted
the government’s request to admit them in their entirety as prior
consistent statements under Fed. R. Evid. 801(d)(1)(B). The court
also allowed the government to present evidence that Riddle and
Bane violated civil banking regulations in order to show that they
possessed criminal intent when they urged TNB–W to buy
participations from Vernon. At trial, the defense objected to the
reports of bank examiners, to the cease-and-desist order, to much
of Meier’s testimony, and to portions of the testimony of Woody
Lemons and Bill Plyler, who served as officers at Vernon and TNB–W
respectively, on the grounds that the government improperly used
civil violations to establish criminal violations. Finally, the
court allowed the government to introduce evidence of four
unrelated loan transactions in which Riddle used his power at TNB–W
for his own personal gain. The court admitted the evidence as
probative of a plan or motive under Fed. R. Evid. 404(b).
9
After seventeen days of trial, the jury returned verdicts of
guilty on all counts as to both defendants. The court sentenced
Riddle to a total of ten years imprisonment and ordered him to pay
four million dollars in restitution.
III.
This was a difficult trial. The government chose methods of
proof that forced difficult trial rulings. We are persuaded that
the trial tactics resulted in an unfair trial, despite the hard
work of the able trial judge to assure the fairness our courts must
deliver.
A.
Before Meier began his testimony, the parties and the court
agreed that the prosecution had not designated him as an expert and
that he would not be offering expert testimony. Counsel for the
government told the court that “what I want this witness to talk
about are the specific facts that he observed.” This would include
such things as accounts of Meier’s interaction with bank officials
during his examinations and personal observations of bank records
and practices.
With this assurance, the trial court allowed the government to
proceed. However, with each new trial day the government pushed to
squeeze as much as possible from this “lay witness.” The result is
clear, certainly now, that during Meier’s two-and-a-half days on
the stand, he wielded his expertise as a bank examiner in a way
that is incompatible with a lay witness. In connection with his
10
examination of TNB–Post Oak, Meier explained that “[a]ccording to
12 C.F.R. 32.5, when repayment is expected from only one source,
then all of the advances must be combined, again, coming from that
one source.” Over the defense’s objections, Meier expressed his
opinion that it was not “prudent” for a bank to rely on repurchase
agreements issued by banks selling participations rather than on
the creditworthiness of borrowers. The next day, Meier expressed
his view that bank officers should discuss OCC circulars when the
bank receives them and that the OCC expects officers such as Riddle
to know the contents of circulars. The defense objected at length
to Meier’s testimony about the OCC’s position on whether a bank
director may bring loans to his bank. In response, the court
reminded that Meier was not an expert, but that his reports had
been available for some time and that his testimony should come as
no surprise to the defense. “Even if you do consider him an
expert,” the court noted, “it seems to me that we have satisfied
the requirements of the rule.”
Meier continued to draw on his specialized knowledge as a bank
examiner. He testified that it was imprudent “to have the buyback
letter stand separate and apart from the participation certificate
itself with neither referencing the other.” He asserted that TNB–W
violated OCC regulations when it failed to record the fact that
Riddle received proceeds from its purchase of participations. He
even speculated that unsafe and unsound lending practices,
including loans to insiders, caused TNB–W’s failure.
11
Under Fed. R. Evid. 701, a lay opinion must be based on
personal perception, must “be one that a normal person would form
from those perceptions,” and must be helpful to the jury. Soden v.
Freightliner Corp., 714 F.2d 498, 510-12 (5th Cir. 1983) (quoting
Lubbock Feed Lots, Inc. v. Iowa Beef Processors, 630 F.2d 250, 263
(5th Cir. 1980)). We have allowed lay witnesses to express
opinions that required specialized knowledge. In Soden, a witness
in charge of truck maintenance testified that, based on his
experience, step brackets caused the punctures in a fuel tank that
had been brought into his repair yard. We held that the district
court did not abuse its discretion when it allowed the plaintiff to
introduce such lay opinion testimony. “No great leap of logic or
expertise was necessary for one in Lasere’s position to move from
his observation of holes in Freightliner fuel tanks at the location
of the step brackets, and presumably caused by them, to his opinion
that the situation was dangerous.” Id. at 512. Other circuits
have construed Rule 701 even more broadly. See Wactor v. Spartan
Transp. Corp., 27 F.3d 347, 351 (8th Cir. 1994) (admitting under
Fed. R. Evid. 701 the opinions of lockmen, “based as they were upon
their years of personal experience, their personal inspection of
the lockline, their participation with Wactor in the stoppage of
the barges, and their positions as the sole eyewitnesses to the
wrapping, fouling, and breaking of the line”); Williams Enterprises
v. Sherman R. Smoot Co., 938 F.2d 230, 233-34 (D.C. Cir. 1991)
(allowing an insurance broker who had personal knowledge of an
insured’s business to offer lay opinion testimony on the cause of
12
an increase in the insured’s premiums); United States v. Fowler,
932 F.2d 306, 312 (4th Cir. 1991) (admitting lay opinion evidence
as to whether a certain government official would know whether
classified budget documents were available to contractors).
Meier, however, went beyond the lay testimony in Soden, as
well as the testimony in cases from other circuits. He did not
merely draw straightforward conclusions from observations informed
by his own experience. Instead, he purported to describe sound
banking practices in the abstract. He told the jury how the OCC
viewed certain complex transactions. And he asserted a causal
relationship between Riddle’s alleged wrongdoing and the ultimate
failure of TNB–W. He functioned not as a witness relaying his own
observations so much as a knowledgeable bank examiner who could
provide the jury with an overview of banking regulations and
practices and who could authoritatively condemn Riddle’s actions.
He did not offer testimony that a lay person would have been able
to offer after conducting the examinations. The district court
erred in allowing Meier’s testimony under Fed. R. Evid. 701.
The government insists that Meier was nothing more than a fact
witness because his review of TNB–W files and the 1985 and 1986
examinations gave him personal knowledge of their contents. It is
true that “[t]he modern trend favors the admission of opinion
testimony, provided that it is well founded on personal knowledge
and susceptible to specific cross-examination.” Teen-Ed, Inc. v.
Kimball Int’l, Inc., 620 F.2d 399, 403 (3d Cir. 1980). Based on
this rule, Meier could draw specific conclusions from his work on
13
the 1984 and 1987 examinations, such as that Riddle did not heed
Meier’s 1984 advice on self-dealing. See United States v. Leo, 941
F.2d 181, 192-93 (3d Cir. 1991) (allowing an auditor to relate the
basis for his opinion that the defendant had altered purchase order
dates in a government contract); United States v. Grote, 632 F.2d
387, 390 (5th Cir. 1980) (allowing an IRS official to compare a
defendant’s tax returns by characterizing some as “acceptable” and
some as “unacceptable”), cert. denied, 454 U.S. 819 (1981). But
latitude under Rule 701 does not extend to general claims about how
banks should conduct their affairs. Meier’s opinions that TNB–W
operated imprudently and that its imprudence caused it to fail
depend on an expert’s understanding of the banking industry.
The government also contends that Meier’s opinions were
admissible because the prosecution identified him as a witness long
before trial and provided his reports to the defense. At trial,
however, the government made a point of presenting Meier as a fact
witness rather than as an expert. “[A] party cannot seek to have
a witness certified as an expert on appeal when the party did not
seek to have the witness qualified as an expert before the district
court.” Leo, 941 F.2d at 192 (citing United States v. Hoffner, 777
F.2d 1423, 1425 n.1 (10th Cir. 1985)).
B.
The defense proposed to offer Stephen Huber, a professor at
the University of Houston Law Center, to show that banking
regulations did not require Riddle to disclose his interest in the
Vernon participations and that Riddle and TNB–W adhered to industry
14
standards when it purchased loans from other banks. The court
ultimately acknowledged that Meier was mistaken when he stated that
12 C.F.R. pt. 31 required Riddle to report that the purchase of
participations from Vernon would allow Vernon to finance the
Superior Oil deal. As Professor Huber explained at the hearing,
the regulations do not apply when a bank buys participations from
a thrift.
The government, then, had to prove that Riddle knew that he
was doing something wrong even though he was committing no
regulatory violation. Much of Meier’s testimony was an effort to
convince the jury that Riddle encouraged the TNB–W board to engage
in unsafe lending practices when he encouraged it to buy
participations from Vernon. Had he been allowed to testify, Huber
would have told the jury that TNB–W handled the Vernon
participations in the way that any other bank would have handled
them. According to Huber, it is difficult for banks buying small
loan participations to acquire documentation from the borrower, so
they routinely rely on buyback letters issued by the selling bank.
After more than two weeks of testimony, it is understandable
that the court would be wary of allowing the defense to present an
expert witness to testify about the proper interpretation of
regulations and to make general statements about banking practices.
But after giving Meier extensive leeway, the court abused its
discretion in refusing to allow Huber to testify regarding Riddle’s
knowledge that he was doing something wrong in not making the
disclaimer to the board. Testimony that other banks would have
15
made the same decision to buy the Vernon participations would have
supported Riddle’s contention that any failure to disclose his
interest was not deceitful or even intentional. With Huber’s
testimony, the defense could have countered some of the damaging
opinions offered by Meier and contained in the OCC examinations.
The loss of Huber’s testimony handicapped the ability of the
defense to tell the jury its own version of how banks operate and
what precautions bankers such as Riddle know they should take.
C.
According to Riddle, the district court admitted into evidence
a variety of documents that prejudiced the jury. Among other
things, Riddle objects to the admission of portions of the four
bank examinations, a proffer letter from Dixon’s attorney, and
transcripts of Dixon’s proffer statements.
During Meier’s testimony, the court ruled that it would admit
those portions of the OCC reports that Meier read from or discussed
during his direct examination. Riddle argues that the reports are
inadmissible hearsay. We assume for the sake of argument that the
reports were “matters observed pursuant to duty imposed by law as
to which matters there was a duty to report” and that bank
examiners are not “police officers” or “other law enforcement
personnel.” Fed. R. Evid. 803(8)(B). See United States v. Copple,
827 F.2d 1182, 1189 (8th Cir. 1987) (“[Admitting an FDIC]
investigation is not improper merely because it seeks evidence that
by its nature could be relevant to a civil as well as to a
potential criminal proceeding.”), cert. denied, 484 U.S. 1073
16
(1988); United States v. Quezada, 754 F.2d 1190, 1194 (5th Cir.
1985) (admitting a warrant of deportation under Rule 803(8)(B)
because it was “prepared in a routine, non-adversarial setting”
rather than “from the arguably more subjective endeavor of
investigating a crime and evaluating the results of that
investigation”).
But even if the reports fall under a hearsay exception, Riddle
has a strong argument that their contents prejudiced him and that
some of the reports were not relevant. The government’s asserted
purpose in offering the reports was to show that investigators told
Riddle in 1984 that banks should not rely on repurchase agreements
to assure the creditworthiness of loan participations and told him
in 1985 that bank officers may not take advantage of their
positions to obtain loans. We agree that these facts are relevant
to Riddle’s knowledge that his plan to use TNB–W to free up funds
for the Superior Oil project was a violation of law or that he had
some other duty to disclose his project. Unfortunately, the
reports conveyed statements and implications that conveyed much
more information to the jury.
All four reports include sections entitled “Violations of Law
and Regulation.” The 1984 report limits its criticism of TNB–Post
Oak to its violation of lending limits when it purchased five
$800,000 participations from the same bank. Later reports,
however, contain longer lists of violations and more pointed
criticism of TNB–W. Among other regulatory and statutory
violations, the 1985 report cites the bank for violation of 12
17
C.F.R. pt. 215.5(c)(3) for the $400,000 loan to Riddle. The cover
letter to the 1986 report makes an ominous diagnosis:
Significant law violations were disclosed involving
insiders. These included infractions of the legal
lending limits and repeat violations involving loans to
insiders, Regulation O. Directors are reminded of their
potential liability for losses sustained on credits
exceeding legal limitations. Satisfactory procedures
must be implemented to prevent future violations.
The report mentions Riddle in connection with violations of 12
U.S.C. § 375a and 12 C.F.R. pt. 215.5(c)(3). And the cover letter
to the 1987 report announces that
[t]he condition of the bank was found to be extremely
critical. . . . The extremely critical condition of the
loan portfolio is the direct result of the poor credit
underwriting standards of the previous management in
conjunction with insider abuse, suspected fraudulent loan
transfers, and the rapid and extended deterioration in
the Houston area economy.
That report included descriptions of violations of TNB–W’s legal
lending limits that contributed in part to the appointment of an
FDIC receiver.
Introducing these documents into evidence did more than
provide the jury with evidence that Riddle knew that he should have
come clean with the TNB–W board. It provided the jury with a four-
year history of Riddle’s banking endeavors that tied him to dozens
of regulatory violations. It gave the jury reason to connect
Riddle’s 1985 scheme with two gloomy reports issued after his
allegedly criminal conduct was complete. At bottom, it put Riddle
at the center of a spectacular bank failure. But Riddle was not on
trial for being an ineffective or even a corrupt banker. He was on
trial for using his position as a TNB–W officer to convince the
18
TNB–W board to purchase participations from Vernon that would help
him personally and disregarding his duty to disclose his personal
interest in the deal. The reports — as well as much of Meier’s
testimony drawn from them — were of little probative value on that
score in comparison to the danger of prejudicing, confusing, or
misleading the jury. See Fed. R. Evid. 403. Indeed, it is
difficult to understand how the 1987 examination was relevant at
all; its primary purpose seems to have been to allow Meier to
testify based on the 1985 and 1986 reports, which he relied on in
preparing the 1987 report. We said in United States v. Christo,
614 F.2d 486, 492 (5th Cir. 1980), that “[t]he government’s
evidence and argument concerning [regulatory] violations . . .
impermissibly infected the very purpose for which the trial was
being conducted — to determine whether Christo willfully misapplied
bank funds with an intent to injure and defraud the bank, not
whether Christo violated a regulatory statute prohibiting the bank
from extending him credit in excess of $5,000.” The same principle
applies in this case. The trial court abused its discretion when
it allowed the government to admit extensive evidence about the
OCC’s appraisal of TNB–W’s general health and its failure to comply
with regulations from its inception to its demise.1
1
Riddle also calls our attention to the court’s decision to
admit the cease-and-desist order issued against TNB–W on November
13, 1986. The transcript discloses that the court did admit the
order, but the court decided not to send it back with the jury.
The record is unclear on whether the jury ever actually saw the
order. Nevertheless, Plyler testified that the bank received the
order and that it meant that TNB–W had to “stop . . . continuing
with unsafe lending practices.” As we indicated in Christo, 614
F.2d at 495, the mention of irrelevant cease-and-desist orders is
19
Riddle also objects to the admission of two documents in which
Dixon connects Riddle with banking violations. The first is a
letter and accompanying memorandum that Dixon’s attorney sent to an
Assistant United States Attorney in which Dixon offers to provide
information about criminal abuses by bank insiders. The unusual
offer lists seventeen institutions, twenty-nine individuals, and
twenty generic situations involving banking violations. It does
not, however, indicate which institution or individual corresponds
to which situation. Thus, Riddle’s name appears as an individual
who could have been involved in a number of crimes at a number of
institutions. The second is Dixon’s sworn statement used in the
grand jury investigation of Riddle.
The government moved to admit the letter and memorandum and
the sworn statement under Fed. R. Evid. 801(d)(1)(B) as a prior
consistent statement to rebut the defense’s suggestion that Dixon
fabricated his testimony in order to cut short the prison term he
was serving. The defense objected that the statement was not
proper rebuttal because Dixon had the same motive to fabricate when
he made the statement and sent the letter as he had in court.
According to the defense, admission under Rule 801(d)(1)(B) would
require a statement made before Dixon had any motive to reduce his
time in prison by pleasing the government.
At the time of trial, our law did not impose this requirement.
United States v. Parry, 649 F.2d 292, 296 (5th Cir. Unit B 1981).
highly prejudicial. Even if the jury never laid eyes on the order
itself, the government’s reference to the order during Plyler’s
direct examination was ill-advised and should not have been made.
20
The Supreme Court, however, has since instructed that Rule
801(d)(1)(B) “permits the introduction of a declarant’s consistent
out-of-court statements to rebut a charge of recent fabrication or
improper influence or motive only when those statements were made
before the charged recent fabrication or improper influence or
motive.” Tome v. United States, 115 S. Ct. 696, 705 (1995).
Consequently, admitting the statement and the letter was an error.
Apart from the court’s action under Rule 801, admitting the
letter and memorandum was inflammatory. According to the
memorandum, “many, if not most, of the activities described herein
expose these Insiders to significant criminal culpability.” By
associating Riddle with more than two dozen alleged white-collar
criminals and a score of criminal scenarios, the memorandum could
easily suggest that Riddle regularly kept company with, as the
memorandum puts it, “good old boys” who make a habit of stealing
from banks. The trial court erred in admitting such a suggestive
and prejudicial document.
D.
Nine government witnesses spent at least part of their time on
the stand discussing four unrelated TNB–W loans that supposedly
showed that Riddle systematically withheld information from the
bank in order to direct loan proceeds for his personal benefit. As
required by United States v. Robinson, 700 F.2d 205, 213 (5th Cir.
1983), the court conducted bench conferences on whether this
evidence had probative value and whether it was unduly prejudicial.
The prosecution viewed the loans as evidence of “other crimes,
21
wrongs, or acts” that showed Riddle’s “motive, opportunity, intent,
preparation, plan, knowledge, identity, or absence of mistake or
accident.” Fed. R. Evid. 404(b). For its part, the court stated
that “it’s relevant to motive, to plan, the way he did business,
the things he did.”
In the first loan, Jim Hague borrowed $350,000 from TNB–W to
buy an apartment complex that Riddle owned and wanted to sell.
Regulators viewed the loan as an illegal extension of credit to
Riddle, but they also concluded in the 1986 examination report that
the violation was a result of a misunderstanding of regulations and
thus was not willful or intentional. TNB–W also loaned $300,000 to
Architects Alliance, Inc., and took an interest in accounts
receivable and inventory as collateral. Riddle was the
architectural firm’s primary client and owed it more than $500,000.
Riddle also owed thousands of dollars to Richard Weems, who had
done extensive mowing and landscaping work at some of Riddle’s
properties. At Riddle’s suggestion, Weems borrowed $20,000 from
TNB–W to keep up with operating expenses while waiting for Riddle
to pay his debt. A fourth extension of credit went to Rick Dover,
Riddle’s real estate partner, who obtained a $415,000 letter of
credit as collateral on a loan issued by a Florida bank to fund the
development of a shopping center.
The government explained during its closing argument that
these extraneous loans showed “that this was the way that John
Riddle did business. That tells you about his mental state when he
was entering into the loan participations for the Superior purchase
22
deal.” In other words, the 404(b) evidence was relevant because it
established that Riddle consistently withheld information from the
bank that he knew he had an obligation to disclose. The
government’s 404(b) theory is in agreement with our analysis in
United States v. Beechum, 582 F.2d 898, 911 (5th Cir. 1978) (en
banc), cert. denied, 440 U.S. 920 (1979):
Where the issue addressed is the defendant’s intent
to commit the offense charged, the relevancy of the
extrinsic offense derives from the defendant’s indulging
himself in the same state of mind in the perpetration of
both the extrinsic and the charged offenses. The
reasoning is that because the defendant had unlawful
intent in the extrinsic offense, it is less likely that
he had lawful intent in the present offense.
The government must present enough evidence to permit a reasonable
jury to conclude by a preponderance of the evidence that Riddle’s
intent in connection with the four extraneous loans was criminal.
United States v. Anderson, 933 F.2d 1261, 1269 (5th Cir. 1991);
United States v. Guerrero, 650 F.2d 728, 734 (5th Cir. Unit A
1981). Riddle is charged with bank fraud, misapplication of bank
funds, and false entries in the records of a bank, all of which
require proof that the defendant knew he was making a
misrepresentation. See United States v. Kington, 875 F.2d 1091,
1097 (5th Cir. 1989) (following the rule that in misapplication
cases, “the government must prove that the defendant knowingly
participated in a deceptive or fraudulent transaction” (emphasis in
original) (quoting United States v. Adamson, 700 F.2d 953, 965
(Former 5th Cir. Unit B) (en banc), cert. denied, 464 U.S. 833
(1983))). In this case, that means that the extraneous loans must
23
make it more likely that Riddle intentionally kept the TNB–W board
in the dark on his personal interest in having TNB–W extend credit.
Our review of the record convinces us that the government did
not meet its burden. At most, the evidence suggests that Riddle
took improper advantage of his position to encourage TNB–W to
extend credit unwisely and for the benefit of his non-banking
endeavors. The OCC itself found that any violation Riddle
committed in connection with the Hague loan was unintentional.
Walter Beard, a TNB–W director, offered undisputed testimony that
the TNB–W board “had to know” that Architects Alliance had done
extensive work for Riddle because Architects Alliance designed
TNB–W’s building. And the government’s evidence does not reveal
any deception in Riddle’s role in generating the loan to Weems or
the letter of credit to Dover. As far as the record is concerned,
Riddle simply suggested that various business associates apply for
loans at TNB–W. Some of Riddle’s associates needed money because
he was unable to keep up with his debts, but that does not by
itself mean that Riddle intended to deceive or defraud the bank.
David Hall, a partner at Architects Alliance, testified that Victor
Bane instructed him to submit his firm’s records of accounts
receivable in a format that excluded Riddle’s name because “it
might reflect poorly” on Riddle if TNB–W knew that Riddle owed so
much money to Architects Alliance. The insinuation, of course, is
that Bane was acting under Riddle’s instructions. Riddle may also
have used Bane to hide his debt to Weems and his involvement in
real estate ventures with Dover to convince TNB–W to extend credit.
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But without evidence from government witnesses, we are not willing
to allow the jury to make such an attenuated inference.
The government’s 404(b) evidence certainly makes Riddle out to
be an irresponsible banker who paid little attention to OCC
warnings. But Riddle was not on trial for irresponsibility. He
was on trial for bank fraud, misapplication of bank funds, and
making false entries. Even if illegal, Riddle’s extraneous self-
serving banking practices are irrelevant under Rule 404(b) unless
they tend to show that he systematically withheld vital information
from the TNB–W board. By allowing the jury to consider these four
loans, the trial court made the mistake of treating general
evidence of poor banking as if it were evidence of Riddle’s
criminal intent to mislead TNB–W’s board of directors.
Even if the extraneous loans were relevant to the government’s
case against Riddle, they failed to meet the second prong of the
Beechum test: “the evidence must possess probative value that is
not substantially outweighed by its undue prejudice and must meet
the other requirements of rule 403.” Beechum, 582 F.2d at 911.
Unduly prejudicial extraneous evidence often plays on the jury’s
emotions unfairly, but “[p]rejudice can result from any of the
significant factors set out in Rule 403, of which inflamed passion
is only one.” United States v. Zabaneh, 837 F.2d 1249, 1265 (5th
Cir. 1988). These other factors include confusion of the issues
and misleading the jury, Fed. R. Evid. 403, and they are especially
troubling when they take up a significant portion of the
government’s case. See Zabaneh, 837 F.2d at 1265-66 (remanding for
25
Robinson findings where a “substantial portion” of the evidence
involved extrinsic offenses and registering concern that “[o]ne
witness’s testimony pertained in its entirety to such an offense”).
The court’s limiting instructions can “substantially reduce”
the danger of prejudice, United States v. Buchanan, 70 F.3d 818,
831-32 (5th Cir. 1995), cert. denied, 116 S. Ct. 1340 (1996), but in
this case they did not counteract the prejudicial effect of
allowing government witnesses to testify about the extraneous loans
for a total of more than a full day. The government called James
Hague, David Hall, and Richard Weems for the sole purpose of
explaining how Riddle had wronged them in connection with the
extraneous loans. In each instance, it was clear that the witness
had a gripe against Riddle that had nothing to do with the charged
offense. Rick Dover, Walter Beard, William Plyler, and bank
examiner Meier also went into the details of the loans. The
government analyzed each loan individually during its closing
argument to remind the jury that Riddle was “manipulating people
and the bank for his personal benefit.” And the 1986 OCC
examination contained detailed descriptions and criticisms of the
Hague and Architects Alliance loans.
When extraneous activity receives such intense, unfocused
attention, it is too likely that the jury will “feel that the
defendant should be punished for that activity even if he is not
guilty of the offense charged.” Beechum, 582 F.2d at 914. In
explaining relevance under the general category of “the way he did
26
business, the things he did,” the court itself demonstrated that
the evidence of extraneous loans is powerful not so much because it
tends to establish Riddle’s motive or scheme, but because it paints
Riddle as lacking the character of an upstanding businessman.2 The
government’s extensive and undiscriminating use of the extraneous
loans was misleading to the jury, not because the jury was not
discerning but because the evidence was offered in such a large and
unchecked way that its permissible limited use was overwhelmed.
IV.
We have found four errors: allowing Meier to testify as a lay
witness, barring the testimony of Professor Huber, admitting the
OCC bank examinations and the Dixon documents, and admitting
testimony about four extraneous loans. We ask now whether these
errors were so harmful that they mandate reversing the conviction.
Turning these rulings in a different direction would have
produced a very different trial. Instead of hours of testimony
about extraneous loans, Professor Huber would have given his
opinion that Riddle and TNB–W operated in the way that any bank
2
Riddle makes much of the trial court’s statement from the
bench that “it’s relevant to the issue of the character, the
government has to prove intent, knowledge, motivation, opportunity,
all those things, and it’s not inflammatory, it’s not unduly
prejudicial if you weigh it in terms of what the government has to
prove, so I’m going to let it in.” According to Riddle, this
indicates that the court improperly admitted the evidence as
general character evidence. We do not base our decision on the use
of the word “character.” It appears that the court merely changed
its direction of the sentence mid-stride; we will not interpret
judges uncharitably when they make extemporaneous remarks from the
bench.
27
would have operated. Instead of reading the OCC’s and Dixon’s
claims that Riddle violated banking regulations, the jury would
have focused on the narrow question of Riddle’s intent when he kept
silent about his interest in the Vernon participations. Looking at
the cumulative effect of the errors, we are persuaded that they are
not harmless and require a new trial. We express no view as to
whether any one of the errors standing alone would be sufficient to
justify reversal.
The judgment of conviction of John C. Riddle is reversed, and
the case is remanded for a new trial.
REVERSED and REMANDED.
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