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United States v. Steele

filed: June 16, 1982.



Aldisert, Weis, and Becker, Circuit Judges.

Author: Aldisert


ALDISERT, Circuit Judge.

The main question for decision in these consolidated appeals, in a complex criminal case involving payment of graft by one of America's largest electrical equipment manufacturing companies to a Puerto Rican official and the laundering of payments to him through a subcontractor based in Bermuda, is whether the indictments are barred by the statute of limitations. Three corporations and three individuals appeal from judgments of conviction and sentence entered on a jury verdict finding them guilty of wire fraud, mail fraud, interstate travel in aid of racketeering, and conspiracy. We affirm the conviction of appellant Twombly, Inc. on interstate travel charges brought in a separate indictment. We reverse all convictions under counts 2, 3, and 5 of the principal indictment, which relate to conduct occurring after November 5, 1975, when appellant General Electric revealed the scheme to the Governor of Puerto Rico, because we hold that the conspiracy ended as a matter of law on that date. We also reverse appellant Robert Naples' convictions on all counts because he withdrew from the conspiracy prior to the period of limitations. We set aside the convictions and remand for a new trial on the remaining counts 1, 4, and 7, because the defendants were denied reasonable notice and opportunity to defend against the specific factual theory on which the government based its argument that the conspiracy extended beyond the accomplishment of its principal objectives and into the period of limitations, and because we are unable to determine whether the jury's verdict was based on an impermissible ground.


The theory underlying the prosecution is that the appellants and others conspired and succeeded in obtaining a multi-million dollar power plant construction contract for appellant General Electric by bribing a Puerto Rican public official, and that they thereby defrauded the government and people of Puerto Rico of the right to the official's faithful and disinterested services, in violation of the federal wire and mail fraud statutes, the Travel Act, and Puerto Rican law. The appellants allegedly created and transferred a "bribe fund" through a complex series of subcontract transactions designed to conceal its source and its payment. The substantive charges set forth in the two indictments relate to conduct that allegedly furthered this conspiracy. Indictment No. 80-73, returned on March 14, 1980, charged appellant Twombly, Inc. in a single count with interstate travel in aid of racketeering in violation of the Travel Act, 18 U.S.C. § 1952. Indictment No. 80-320 was returned on September 4, 1980, charging each appellant in seven separate counts. The two indictments were consolidated for trial. Twombly, Inc. was convicted of the Travel Act offense charged in indictment No. 80-73. Each defendant was acquitted on count 6 of indictment No. 80-320; and each was found guilty of wire fraud, in violation of 18 U.S.C. § 1343 (counts 1 and 2); mail fraud, in violation of 18 U.S.C. § 1341 (count 3); interstate travel in aid of racketeering, § 1952 (counts 4 and 5); and conspiracy, under 18 U.S.C. § 371 (count 7). Each defendant has appealed, and we ordered the appeals consolidated for briefing and oral argument.

The various contentions presented by the several defendants require us to consider whether the prosecution was time-barred as to some or all charges; whether Puerto Rico is a "State" as contemplated in the Travel Act, 18 U.S.C. § 1952; whether the government abused the grand jury process or evidentiary standards in obtaining the indictments; whether there was sufficient evidence to support the convictions of Schenectady Turbine Services, GE, and Twombly, Inc.; whether admission of Bermuda bank records, videotaped depositions, and the past-recollection-recorded testimony of witness Frank Ayer was impermissible; and whether a new trial should be granted because a mid-trial shift in the government's theory of the continuance of the conspiracy denied appellants reasonable notice and a fair opportunity to defend against the government's allegations.


We begin by setting forth generally the facts underlying the prosecution, crediting all testimony in support of the judgment and indulging in all reasonable inferences favorable to the prosecution.


In the spring of 1973, the Puerto Rico Water Resources Authority (PRWRA) invited a number of companies, including appellant GE, to submit bids for the construction of a large steam and gas turbine (STAG) power plant in Aguirre, Puerto Rico. The bid invitation required compliance with certain basic specifications, but it permitted substantial differences among the competing proposals. The Authority's evaluation of the competing bids was, therefore, necessarily complex and somewhat subjective.*fn1

In June 1973, several high-level employees of GE's Gas Turbine Division, including appellant Robert Naples, met to discuss bidding strategy. They agreed that GE would bid both as a prime contractor and as a turbine equipment subcontractor for another prime bidder, Hitachi America, Ltd.

Sometime during the summer of 1973, Richard Kask, an employee in GE's International Sales Division, met with former GE employee Vernon Twombly, the principal owner of appellant Twombly, Inc., which previously had done business in Puerto Rico. Kask said that he believed GE would need assistance in getting the contract, and Twombly indicated that he might be able to assist. Following that conversation, Twombly called appellant Charles Mothon, another former GE employee who was then a marketing representative for Hitachi. Twombly reported Kask's opinion that "help was needed" on the STAG contract, and he suggested that he and Mothon could work together. Mothon replied that he "would have to talk to his friends and find out what was possible." Mothon later called Twombly and indicated that he probably could help, and Twombly relayed that message to Kask. A few days later, Mothon suggested to Twombly that GE would have to pay about $1 million to "friends," a term that Mothon and Twombly understood to refer to persons receiving money in return for aid in obtaining a contract. Mothon indicated to Twombly that his "friend" in this instance was Carlos Velazquez Toro, the Chief of Operations of the PRWRA. Twombly relayed the $1 million figure to Kask.

The bids were opened on September 17, 1973. The competitors were permitted to review each others' bids in detail, according to the PRWRA's usual practice. Hitachi's bid was not competitive, eliminating GE's chance of participating as a subcontractor and leaving GE, Westinghouse (the low bidder), and two other bidders as contenders for the prime contract.

Mothon called Bruce Boni of GE's Gas Turbine Division, an assistant to appellant Robert Naples, a day or two after the bids were announced. Boni and Mothon discussed "what might have to be done if GE was really interested in pursuing the business," specifically the need to pay a "special commission," a topic familiar to both. Boni then suggested to Naples that GE employ Twombly, Inc. as a subcontractor and a conduit for payment of the bribe, if "the proper permission to go ahead" could be obtained. Boni thereafter discussed the matter with Frank Ayer of GE's International Sales Division, and Ayer promised to explore the question with others in that division.

Naples met on September 26, 1973, with appellant Hoyt Steele, a GE Vice President and head of the International Sales Division. Naples suggested that GE should hire Twombly, Inc. as its installation subcontractor and asked Steele to "approve a payment." Steele met the next day with several other officers of the International Sales Division. He instructed Richard Kask to advise Vernon Twombly that Twombly, Inc. would be awarded a STAG project subcontract. If "the question of additional funds [to] be made available" to Twombly arose, Kask was to offer $300,000. Kask reported this information to Twombly the same day. Twombly indicated that $300,000 "was probably insufficient," and Kask communicated his response to Steele. Steele thereafter authorized Kask to offer Twombly $1 million. Kask conveyed the second offer to Twombly, and Twombly to Mothon, and Mothon stated that the proposal was acceptable.

On December 3, 1973, as a result of Velazquez Toro's manipulations of the evaluation process, the PRWRA issued a letter of intent to contract with GE for construction of the Aguirre STAG plant. A draft evaluation report prepared by PRWRA staff had recommended awarding the contract to Westinghouse, but the final report signed by the award committee found GE's bid better by $240,000, less than 1/4 of one percent of GE's adjusted bid.

The Authority thereafter decided to add a "residual fuel option"*fn2 to the project, however, and it temporarily suspended GE's letter of intent on January 8, 1974. GE subsequently learned that Westinghouse was prepared to submit a low bid for the additional equipment, and GE lacked Westinghouse's capacity to fabricate some of the necessary components or "skids"*fn3 in its own plants. Addition of the residual fuel option thus posed a serious threat to GE's slender advantage. GE agreed to add $250,000 to the "special commission," however, and the Authority thereafter decided to negotiate with GE alone for the residual fuel option. GE and the PRWRA signed a contract for construction of the STAG plant on March 15, 1974.


Two factors caused the GE representatives and their co-conspirators to adopt an elaborate subcontract package. First, it was necessary to transfer the "special commission" to Velazquez Toro. Second, it was necessary to conceal the bribe from GE's staff auditors. The government contends also that the evidence would permit an inference that the conspirators adopted the subcontract package to conceal the transaction from "others who might hold them accountable, such as law enforcement officials." The mechanism came to be known as the "scope transfer" because it involved transferring certain functions from the "scope" of the GE Gas Turbine Division to the International Sales Division, and from the scope of GE's own operations to an outside contract. Instead of fabricating certain equipment for the STAG project in its own plants or purchasing it from fabricators at wholesale prices through its Gas Turbine Division, GE purchased the equipment at retail from Twombly, Inc. through the International Sales Division. GE thus transferred to Twombly, Inc. the profits attributable to that equipment; and Twombly, Inc. in turn transferred those profits to Mothon by purchasing the equipment from Turbo-Electric Equipment, Ltd. (TEE), a Bermuda corporation controlled by Mothon. Mothon then delivered the money to Velazquez Toro.

By the spring of 1974, GE had discovered that the margin between the wholesale and retail prices of the equipment in the scope transfer was insufficient to generate the full bribe fund. The "margin deficit" was approximately $439,000, including the $250,000 increase in the bribe commitment that resulted from addition of the residual fuel option. GE therefore sought to generate a larger margin by "scope transferring" two sets of components of the residual fuel option, the residual and water wash skids. GE purchased those skids from Twombly, Inc., which purchased the equipment from TEE, which in turn obtained it from appellant Schenectady Turbine Sales, Ltd., another company primarily controlled by Mothon. This transfer apparently reduced the margin deficit by $101,600. Unanticipated transportation expenses pushed the total deficit to $487,800, however, but GE apparently wrote off that amount as an "initial price reduction." See 7 App. 1648-50.

Payment on the subcontracts between GE and Twombly, Inc. and between Twombly, Inc. and TEE occurred in a series of transfers between the spring of 1974 and June 1976. Because the limitations dates on the two indictments are March 14, 1975, and September 4, 1975, see 18 U.S.C. § 3282, we are concerned only with four payments. Each is the subject of substantive charges, and each is named as an overt act in furtherance of the illegal conspiracy charged in count 7 of the later indictment.

On May 28, 1975, Twombly, Inc. cabled $94,441.50 from a New Jersey bank to TEE in Bermuda for the balance due on four distillate fuel forwarding skids, which were included in the original scope transfer. Indictment No. 80-73, filed March 14, 1980, against Twombly, Inc., ...

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