On Appeal from the United States District Court for the Middle District of Pennsylvania District Court Criminal No. 88-00140.
Sloviter and Greenberg, Judges, and Van Antwerpen, District Judge.*fn*
GREENBERG, Circuit Judge.
Sidney D. Furst appeals from his conviction on multiple counts of theft from pension funds, making false statements in bank records, and making false statements in reports required by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. He contends that his motion at trial for a judgment of acquittal should have been granted and that, alternatively, because of trial errors he should be granted a new trial. He also appeals from the refusal of the district judge to disqualify himself from imposing sentence pursuant to these convictions.
We will reverse the convictions on the theft from pension fund counts and one of the three counts relating to false statements in ERISA records, and direct Furst's acquittal on those counts, but will affirm the convictions on the other counts. We will vacate the sentences imposed on the remaining counts and will remand this matter to the district court for reassignment to a different district judge for imposing a new sentence.
Furst was employed as a Vice President in the trust division of Northern Central Bank (NC Bank) in Williamsport, Pennsylvania, and in this capacity was responsible for investments for a number of trust accounts. Furst had a nationwide reputation in the investment community for his ability to select venture stocks.
In late 1979, Furst began investing the funds of some of the accounts which he oversaw with First Commodities Corporation of Boston (FCCB) and by the fall of 1980, $909,100.00 had been so invested. See Trial Transcript of Jan. 10, 1989, at 125 (testimony of M. Aderhold). Some of these funds were those of the Williamsport Orthopedic Association Defined Benefit Plan (WOA)*fn1 and the Williamsport Foundation (WF).*fn2
As of the fall of 1980, FCCB statements indicated that a very large portion of the funds invested had been lost. At the end of December, 1980, FCCB transferred the remaining sum, $236,015.52, to First Financial Corporation of Miami (FFCM), also identified as First Financial Corporation of America (FFCA).
On August 26, 1981, FFCM sent three checks for $307.10, $256.85 and $269.65 to NC Bank. See Trial Transcript of Jan. 10, 1989, at 132-34 (testimony of M. Aderhold); Trial Transcript of Jan. 11, 1989, at 20 (testimony of M. Aderhold). Although there is no evidence that the checks so indicated, see Trial Transcript of Jan. 11, 1989, at 119-20 (testimony of M. Aderhold), it appears that they represented the last remains of the $909,100.00 investment. See Trial Transcript of Jan. 10, 1989, at 133-34, 141-42, 166-67, 169, 170 (testimony of M. Aderhold); Trial Transcript of Jan. 11, 1989, at 20 (testimony of M. Aderhold).
In October, 1981, Furst directed that an entry be made in the NC Bank computer closing out the WOA investment in FCCB/FFCM for $180,000.00. Thereafter, as Furst explains in his brief:
In Spring, 1982, NC Bank's Trust Division had not received the $180,000 which had been booked as a receivable on the close out of WOA's investment in FCCB in October, 1981. A computer transaction was entered eliminating the receivable, debiting cash, and creating a deficit in the WOA account of $180,000.
Brief for appellant at 6.
In the 1983 WOA annual report Furst represented that FCCB/FFCM owed the fund $180,000.00. Thereafter, in the 1984 annual report Furst represented that the $180,000.00 was uncollected but was earning interest so that the total sum due was $220,617.67.
On February 14 or 15, 1985, an account captioned the WOA Escrow account was created in NC Bank's computer system and was opened with a balance of $0.00. See Appellee's app. at 382-84; Trial Transcript of Jan. 10, 1989, at 56 (testimony of M. Aderhold); Trial Transcript of Jan. 11, 1989, at 62 (testimony of M. Aderhold).
In a memorandum dated February 21, 1985, Richard Neidig, an employee of NC Bank who reported to Furst, sent revised schedules of assets of WOA for use in WOA's annual report for the period ending October 31, 1984. See Gov't Ex. 165. The attached schedule of assets and portfolio summary both indicated: "The above market value does not include $220,617.67 being held in the W.O.A., Inc. Pension Escrow account," id., the account which had just been opened the week before with no balance.
In September 25, 1985, Furst engaged in a three-step transaction to sell stock held by another account he controlled, Stock Bond Fund 501C, to an ERISA account, Stock Fund Number 2, he also controlled.*fn3 See Trial Transcript of Jan. 10, 1989, at 54, 55, 57 (testimony of M. Aderhold). The stock involved was a venture capital stock in the Machine Vision Company. By buying the stock from the first account at a lower price than he sold it to the third account,*fn4 Furst generated $240,000.00 in the second account, the WOA Escrow account, through which the trades were implemented. This was the first positive balance the WOA Escrow account had since it was opened on or about February 14, 1985. See Appellee's app. at 383-85; Trial Transcript of Jan. 10, 1989, at 56-57 (testimony of M. Aderhold).
On September 30, 1985, the sum so generated was distributed to WOA, one of the accounts that had lost money as a result of the FCCB/FFCM investment. See Trial Transcript of Jan. 10, 1989, at 57-60 (testimony of M. Aderhold); Trial Transcript of Jan. 11, 1989, at 19-20, 30, 81-82 (testimony of M. Aderhold).*fn5
On October 31, 1985, WOA's fiscal year ended and its annual report reflected the receipt of $240,000.00. However, instead of indicating that this sum was attributable to the gains generated through the Machine Vision trade, the report represented that the $240,000.00 was the $220,617.67 account receivable due from FCCB/FFCM listed in the 1984 annual report together with interest.
In the fall of 1985, Furst and another NC Bank employee, Marshall Raucci, were negotiating with Guarantee Bancshares (GB) about leaving NC Bank to open a trust company for GB. In December, 1985, Furst and Raucci met with GB's officers and GB's attorney, David W. Marston, to discuss how Furst and Raucci should conduct themselves during the interim period before they left NC Bank.
On December 26, 1985, Furst conducted a second internal stock trade through accounts he controlled, this one involving stock in the Rocking Horse Child Care Center. Like the earlier trade this transaction used different rates for the two sales,*fn6 thus generating a sum that was distributed to WF, one of the other accounts that had lost money as a result of the FCCB/FFCM investment.*fn7 As in the case of the Machine Vision transaction, the second transfer of the Rocking Horse shares was to ERISA accounts. Neidig facilitated this internal stock trade and the distribution of the proceeds.
In April, 1986, Furst and Raucci left NC Bank and established Guarantee Trust Company in Williamsport, Pennsylvania, for GB. In October, 1986, as allegations of misconduct by Furst in his position at NC Bank began to surface, officers of GB requested that he attend a meeting in Philadelphia to explain the situation. The meeting was attended by William Dimeling, GB's chairman, see appellee's app. at 649, Marston, GB's attorney who arrived after the meeting started, Furst, and Richard East. See appellee's app. at 649, 666-67, 681 (listing those present as Furst, Dimeling, Marston, and East); Gov't Ex. 175 (same).
East was an officer of Tobias Knoblauch Private Bank, a bank not affiliated with GB, but in which GB's chairman, Dimeling had an interest. It appears that Dimeling asked that East be present because East had actually heard the specific allegations of misconduct. See appellee's app. at 667.
At the October, 1986, meeting Furst related most of the foregoing facts to those present. Furst allegedly explained that he was aware of three potential areas in which his conduct at NC Bank may have been questioned. First, he had distributed the proceeds of a class action settlement into the trust department's operating funds rather than to specific beneficiaries. Second, he had traded in his mother's account, an activity for which he had been criticized at NC Bank. He indicated, however, that inasmuch as he had her permission he did not think this presented any real problem. Third, Furst explained that "he had invested in some gold commodities on behalf of a couple investment funds in the early eighties and had sustained substantial losses and had used other trades subsequently to 1980 to try to make good the losses in those accounts." Appellee's app. at 685-86. This third area of potential difficulty related to the Machine Vision and Rocking Horse transactions.
With respect to this third area, Furst allegedly explained that the commodities had declined in value by $700,000.00 shortly after the investment. See appellee's app. at 686. Moreover, Furst supposedly admitted that he carried the commodities investment on the books at the value of the original investment so that the investors were unaware of the loss. See appellee's app. at 687. And Furst allegedly explained that he used profits generated from internal bank trades to make up the commodities loss. See appellee's app. at 687-88. Furst allegedly conceded that if a subordinate had engaged in these transactions and it came to his attention, Furst would have been forced to terminate him. See appellee's app. at 690-91.
At the end of this meeting Marston suggested that Furst should obtain independent legal representation.
B. The Development of This Litigation
On August 26, 1988, a federal grand jury for the Middle District of Pennsylvania returned a twenty-eight count indictment against Furst including allegations of bank fraud, theft from pension funds, making false statements in bank records, misapplication of bank funds, and making false statements in reports required by ERISA.
A jury trial commenced on January 9, 1989. At the close of the government's case the district court dismissed counts XII through XVII and XX on Furst's motion for acquittal but otherwise denied that motion. Furst unsuccessfully renewed his motion for acquittal on the remaining counts at the end of the presentation of all the evidence. On January 27, 1989, the jury returned a verdict of guilty on counts III and IV, which had charged embezzlement from pension funds, counts V through VII, which had charged making false statements in bank records, and counts IX through XI, which had charged making false statements in ERISA documents. The jury reached no verdict on the remaining counts.
On March 20, 1989, notice of sentencing was mailed to Furst and on April 3, 1989, Furst filed a motion to disqualify*fn8 Judge Kosik, who had presided over Furst's trial, from participating in his sentencing. See brief for appellant at 19. This motion was based exclusively on 28 U.S.C. § 455. This motion and the accompanying affidavit of Robert L. Potter, Furst's attorney, asserted that the district judge had engaged in ex parte communications during the course of the trial and that during these discussions, the judge had attempted to encourage a plea bargain and had made comments regarding the likelihood of enhanced sentences should the case be tried and result in a guilty verdict. See brief for appellant at 19. The motion concluded with the statement that "Furst has reasonable ground to question whether Judge Kosik would be willing to follow the law and act in an unbiased and impartial manner at sentencing." Appellant's app. at 793.
On April 6, 1989, the district court filed a memorandum opinion denying the motion without hearing, primarily on the ground that it was untimely. See appellant's app. at 819. The following day, Furst was sentenced to five year concurrent terms of imprisonment on each count and was required to make restitution of $358,757.50. Immediately following the imposition of sentence, the government filed a motion pursuant to Fed.R.Crim.P. 48(a) to dismiss without prejudice the counts of the indictment not previously dismissed and on which no verdict was returned and the court granted the government's motion. On April 7, 1989, Furst filed his timely notice of appeal and moved for release pending appeal. The district court denied the motion but on April 21, 1989, we granted Furst's motion.
We have jurisdiction under 28 U.S.C. § 1291. The district court had subject matter jurisdiction under 18 U.S.C. § 3231 inasmuch as each of the counts of the indictment charged Furst with violation of federal criminal laws.
II. GROUNDS FOR ACQUITTAL
A. The Embezzlement Charges
In counts III and IV of the indictment Furst was charged with violations of 18 U.S.C. § 664 which provides that:
Any person who embezzles, steals, or unlawfully and willfully abstracts or converts to his own use or the use of another, any moneys, funds, securities, premiums, credits, property or other assets of any Employee Welfare Benefit Plan or Employee Benefit Plan [is guilty of a crime].
It is indisputable that one substantive element of 18 U.S.C. § 664 is that the account from which funds are embezzled must be one of the two types of accounts defined in the statute; if the account is not governed by ERISA, section 664 is inapposite. Consequently, if the government did not produce evidence from which the jury could conclude that the account from which funds were embezzled was an ERISA account, Furst's motion for acquittal on the section 644 charges should have been granted.
Our standard of review is whether the record, when viewed in the light most favorable to the government, contains "substantial evidence" to support the jury's determination of guilt. See Glasser v. United States, 315 U.S. 60, 80, 62 S. Ct. 457, 469, 86 L. Ed. 680 (1942); United States v. Aguilar, 843 F.2d 155, 157 (3d Cir.), cert. denied, 488 U.S. 924, 109 S. Ct. 305, 102 L. Ed. 2d 324 (1988).
The stock transactions which formed the basis for these counts were made in three steps. In step 1 appreciated stock was removed from a non-ERISA account and placed in a second account, WOA Escrow, in return for which the non-ERISA account was to be paid the price for which it had purchased the stock and market interest on that sum. Thus, in step 1 the portion of the stock's value that reflected appreciation over market interest was removed from the non-ERISA account without compensation. The indictment, however, did not charge Furst with any crime with respect to the non-ERISA accounts and any wrongful acts of Furst as to those counts would not constitute a violation of 18 U.S.C. § 644.
In step 2 Furst caused an ERISA account to purchase the appreciated stock in Machine Vision or Rocking Horse then held by the second account, WOA Escrow, and the consideration was paid into the second account. The purchase price did not exceed the price at which stock in those companies then publicly traded, although it was significantly in excess of the price at which the non-ERISA account had sold the stock to WOA Escrow in step 1.
In step 3 the second account made good its obligation to the non-ERISA account in step 1 and the balance of funds, representing the appreciation in the stock which was removed from the non-ERISA account without compensation, was disbursed to accounts in which Furst had made the FCCB/FFCM investments which had gone bad.
The government's theory charges that the purchase by the ERISA accounts in step 2 depleted the ERISA funds. However, this theory is dependent on evidence that the ERISA accounts paid a price in excess of the market value of the stock and without such proof Furst's conviction under 18 U.S.C. § 644 cannot be affirmed.
The government asserts that there is evidence that the Machine Vision and Rocking Horse stock had a lower value than claimed by Furst and that the ERISA accounts were accordingly overcharged. The first basis of this argument is the observation that the Machine Vision stock purchased in step 1 at $2.00 per share was sold the same day in step 2 at $4.40 per share, that the Rocking Horse stock purchased in step 1 for $3.25 per share was sold the same day in step 2 at $4.35 per share, and that the WOA Escrow account was used as a "sham intermediary" for these transactions. See brief for appellee at 31. The second basis of this argument is that the market values asserted by Furst reflect the value of unrestricted stock, that is, stock as to which there was no restriction on sale, while the stock subject to these transactions was severely restricted, although it apparently could be internally traded by NC Bank. The government argues that unrestricted stock is worth more than restricted stock.*fn9
The problem with the first observation is that we have no basis to assume that the ERISA accounts were overcharged, for it may well be that instead the non-ERISA accounts were underpaid. Consequently, the government theory relying on the alleged overcharges in step 2 requires some proof of value to demonstrate the overcharge in addition to the difference in stock prices, so that Furst would not be convicted of an overcharge in step 2 simply because the government had made out a case for under-compensation in step 1. There was no such proof.
The problem with the government's second argument that the ERISA funds were depleted is that the government does not contend that it produced any testimony regarding the specific relationship of the market value of restricted and unrestricted stock in Machine Vision and Rocking Horse so that reasonable conclusions could be reached as to the discount from market value to be taken in valuing restricted stock.
The government bears the burden of proof on each and every substantive element of a criminal offense. While the government may contest the values Furst associated with the stock which formed the subject of these transfers, it had the burden of affirmatively establishing that the value of the stock was below that which Furst caused the ERISA accounts to pay for it. When the government's prosecution under 18 U.S.C. § 664 arises in the context of a sale of property, the government accordingly bears the burden of producing evidence that the property was worth less than the ERISA accounts paid.
The government did not meet its burden of proof in this case. Consequently, though the transactions are certainly disturbing, Furst's motion for acquittal should have been granted on counts III and IV and we will reverse his conviction on those counts and remand for entry of a judgment of acquittal on them.*fn10
B. The Bank Record Charges
Counts V, VI, and VII of the indictment charged Furst with making false statements in bank records in violation of 18 U.S.C. § 1005. The relevant portion of this section provides that: "Whoever makes any false entry in any book, report, or statement of [any subject bank] with intent to injure or defraud such bank, or any other company, body politic or corporate [is guilty of a crime]."
The allegedly false statements related to the distribution of the proceeds from one of the two sales between accounts that constituted the subject of the embezzlement charges.*fn11 Specifically, each of the three counts relates to a similar statement in three different accounts accompanying the distribution of the December, 1985, gain generated in the Rocking Horse trades. Counts V, VI, and VII related to the WF-Waldron account numbered 71093-50-4, the WF-Graham account numbered 71088-83-5, and the WF-Snowden account numbered 71089-98-1, respectively. See supra note 7.
In particular, Furst is charged with having represented that the funds generated from the internal stock trades which he distributed to accounts that had invested in FCCB/FFCM were in fact returns from the FCCB/FFCM investment. With respect to these counts Furst contends that the district court erred in failing to acquit him as a matter of law.
Our standard of review is whether the record, when viewed in the light most favorable to the government, contains "substantial evidence" to support the jury's determination of guilt. See Glasser v. United States, 315 U.S. at 80, 62 S. Ct. at 469; United States v. Aguilar, 843 F.2d at 157.
On December 26, 1985, Furst traded Rocking Horse shares from one fund he controlled, Stock Fund A, to the WOA Escrow account at $3.25 per share, a price reflecting the original purchase price with market interest from the date of purchase. Furst then traded the shares from WOA Escrow to Stock Funds 1 and B at $4.35 per share. Furst then distributed $291,133.70 of the gain generated in WOA Escrow by virtue of the difference in the prices to other accounts within the Williamsport Foundation (WF) over which he also had investment control.*fn12
The distribution of the $291,133.70 gain was actually made by Neidig, an NC Bank employee, who reported to Furst. At trial the government's theory of counts V, VI and VII was that "[although] Furst himself did not actually print false statements, he caused the offenses to be committed by his administrative assistant, Mr. Neidig." Brief of appellee at 40-41.
It is undisputed that Neidig, not Furst, completed the paperwork and various trading tickets and forms involved in the two transactions. Neidig handwrote a memorandum in which he instructed the operations department of the trust division to make cash transfers from the WOA Escrow account to the various WF accounts with the following explanation: "Proceeds from termination of First Commodity Corp. Multiple Futures Commodities Program #2."* ...