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United States v. Weinberg

decided: September 23, 1955.


Author: Mclaughlin

Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The indictment in this matter charged that in connection with certain schools for veterans the defendants did "conspire, confederate and agree together and with each other and with Arthur B. Jenkins, John F. Yekel and Louis Shaffer who are named herein as co-conspirators but not indicted, to defraud the United States out of certain monies by fraudulently inflating the cost basis of the tuition rate and by fraudulently inflating and increasing the cost to be charged to the Veterans Administration of furnishing to said veterans the books, supplies and equipment necessary for the satisfactory pursuit and completion of the courses of education and training in which they were enrolled."

The indictment went on to allege that: "It was a part of said scheme and plan that the defendants Morgan Bird, Sr., and Alfred Lee Weinberg would not permit the said Schools to purchase comsumable instructional supplies, and books, supplies, and equipment at the lowest possible cost available to said Schools but would organize a separate and independent corporation, the Mercury Distributors Inc., which would be used by said defendants for the purpose of purchasing consumable instructional supplies and the books, supplies, and equipment at the lowest possible cost and reselling such supplies and material to the various Schools at an increased price far above the actual cost and at a substantial profit to said Mercury Distributors, Inc., and the defendants Morgan Bird, Sr., and Alfred Lee Weinberg. The said defendants agreed that the defendant Weinberg, would direct that orders for such consumable instructional supplies and for books, supplies and equipment be placed by said Schools through the Mercury Distributors, Inc., and that the Mercury Distributors, Inc., would then purchase said supplies and material at the actual cost prices therefor and add to said prices large and inflated mark-ups and then resell the same to said Schools at exorbitant and inflated prices and in excess of the price at which the Schools could themselves purchase consumable instructional supplies and books, supplies and equipment in the open market place. The said defendants agreed that the defendant Weinberg would cause the aforesaid schools to represent to the Veterans Administration that the actual and true cost of said consumable instructional supplies and said books, supplies, and equipment was the exorbitant and inflated price which the Schools were required to pay to said Mercury Distributors, Inc., and would cause the said Schools to submit to the Veterans Administration an inflated cost of operation as a basis for determining the tuition rate to be paid said Schools and to present vouchers and claims upon the United States to the Veterans Administration for reimbursement for the cost of said books, supplies, and equipment at the inflated prices."

The so-called conspiracy statute under which the above indictment was brought, 18 U.S.C. § 371, reads:

"If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined not more than $10,000 or imprisoned not more than five years, or both. * * *"

We are concerned here with only the second part of this statute which we have emphasized above. In other words the crime charged by the Government is not a conspiracy to commit an offense against a particular section of the Veterans Act but rather an ordinary conspiracy to defraud the United States or an agency thereof. Appellants allege that the indictment does not set forth sufficient facts to charge this crime. We think it does.

The scheme as asserted by the Government was simple and effective. The defendants inflated the cost basis of the schools by creating a dummy corporation (Mercury) through which they sold supplies and tools to the schools taking an unwarranted middleman's profit. Appellants protest at length that there was no manipulation of the accounts of Mercury or the schools and therefore no crime. The vice of the situation as urged and proved by the Government was not entries false on their face but the basic wrong of foisting upon the true expense for the schools, the school owners and managers themselves as an utterly unnecessary selling agent which collected an unconscionable profit completely contrary to the intent of the Act.

The premise of the Government's fundamental contention was firmly established. The appellants, admittedly owners of the schools involved, were shown to be the real organizers and owners of the Mercury corporation which furnished the supplies and materials to the schools. There was credible evidence that the schools could have bought those items direct from the manufacturers at the same low wholesale prices as Mercury and that the total overpayment by the Veterans Administration to the schools based on the percentage of gross profit to Mercury was $67,407.30.*fn1 According to Government proof $15,025.88 of this was for tools not even purchased by the schools or Mercury.

To the extent that a legal apparatus was used to achieve a fraudulent end, this case is analogous to the situation that confronted the Supreme Court two years ago in Lutwak v. United States, 1953, 344 U.S. 604, 73 S. Ct. 481, 485, 97 L. Ed. 593. Lutwak and his co-defendants were convicted of conspiring to defraud the United States by obtaining the illegal entry of three aliens into the United States. The method used was to have three honorably discharged veterans journey to Paris and marry three aliens who would then be brought into this country under the War Brides Act, 59 Stat. 659. Answering the contention, seriously urged, that the conspiracy "was not unlawful because the marriages involved were valid marriages", the majority of the Supreme Court stated in 344 U.S. at page 611, 73 S. Ct. at page 486:

"We do not believe that the validity of the marriages is material. No one is being prosecuted for an offense against the marital relation. We consider the marriage ceremonies only as a part of the conspiracy to defraud the United States and to commit offenses against the United States. In the circumstances of this case, the ceremonies were only a step in the fraudulent scheme and actions taken by the parties to the conspiracy. By directing in the War Brides Act that 'alien spouses' of citizen war veterans should be admitted into this country, Congress intended to make it possible for veterans who had married aliens to have their families join them in this country without the long delay involved in qualifying under the proper immigration quota. Congress did not intend to provide aliens with an easy means of circumventing the quota system by fake marriages in which neither of the parties ever intended to enter into the marital relationship; that petitioners so believed is evidenced by their care in concealing from the immigration authorities that the ostensible husbands and wives were to separate immediately after their entry into this country and were never to live together as husband and wife. The common understanding of a marriage, which Congress must have had in mind when it made provision for 'alien spouses' in the War Brides Act, is that the two parties have undertaken to establish a life together and assume certain duties and obligations. Such was not the case here, or so the jury might reasonably have found."

In our own case the validity of the corporate organization of Mercury is not material. Nor do we dispute the right of a bona fide middleman in appropriate circumstances to a legitimate profit. Here, however, the formation of Mercury by the school directors constituted an important step in their scheme to defraud the Veterans Administration, an agency of the United States, by inflating the costs of the schools.

Congress passed the "'Servicemen's Readjustment Act of 1944'", 38 U.S.C.A. § 693 et seq., in order to "provide Federal Government aid for the readjustment in civilian life of returning World War II veterans." 58 Stat. 284 (1944). The educational features of the Act gave eligible veterans the opportunity to obtain vocational training at the Government's expense. To this end, the Act empowered the Veterans Administrator to pay to the training institution which the veteran attended "the customary cost of tuition" and to "pay for books, supplies, equipment, and other necessary expenses * * *;" and where there was "no established tuition fee" the Administrator was to provide for "fair and reasonable compensation * * *." 58 Stat. 289 (1944). Under the Veterans Administration regulations, the school was required to submit cost data annually in order to aid the Veterans Administration in determining the proper tuition rate. As for supplies, each institution was required to "assure itself that the Veterans' Administration is not billed at an unreasonable price." 38 C.F.R. § 21.539(e).

If within the scope of this high purposed Act school directors can line their own pockets by deliberately organizing and using one unnecessary corporate middleman, then it is as fair for them to use three or four intervening corporations thus raising the ultimate government-borne cost by three or four unnecessary mark-ups. The intent and language of the legislation together with the regulations promulgated thereunder persuade us that Congress did not wish either to legitimize or to underwrite such unscrupulous scheming. As the indictment asserts, we think "it was understood that the cost charged by the Schools to the Veterans Administration would be the actual, real, true, and accurate cost of such books, supplies, and equipment."

In United States v. Furer, D.C.S.D.Cal.1942, 47 F.Supp. 402, 403, a trial quite similar to this one, Lockheed and Vega Aircraft Corporations had "'cost plus fixed fee'" contracts with the United States Government for the construction of military airplanes. Furer and his co-defendants were indicted for conspiring to defraud the United States. Their fraudulent plan was to procure subcontracts for parts from Lockheed and Vega by bribing employees of those corporations. Unlike our situation, there was no allegation that ...

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