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United States v. Serlin

decided: July 6, 1976.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
SHELDON SERLIN AND MARVIN PHILLIPS, DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division No. 74 CR 671 ABRAHAM L. MAROVITZ, Judge.

Pell, Tone and Bauer, Circuit Judges.

Author: Bauer

BAUER, Circuit Judge.

This is a mail fraud case wherein nine persons and two corporations were charged with violating 18 U.S.C. 1341.*fn1 Both defendants*fn2 were found guilty by a jury and sentenced to various terms of imprisonment and probation. On appeal the defendants have raised a multitude of legal issues alleging principally: government misconduct, a failure to prove a crime under the mail fraud statute, and violation of their due process rights by various procedural and evidentiary rulings in the trial court. We affirm.

I. THE FACTUAL BACKGROUND

The indictment charged that the defendants conducted a scheme to defraud under the corporate names of Cardet International, Inc. ("Cardet") and Mercantile Loan Corporation ("MLC") between July 1971 and December 1972. Basically, the indictment alleged that the defendants sold purported distributorships or franchises of Cardet merchandise to victims of the mail fraud. In order to finance the purchase of these franchises, the defendants arranged for the buyers to obtain loans from MLC.

There is a wealth of information in the record evidencing how the defendants induced persons to buy franchises. Fifteen franchisees testified as to how they were induced to buy a Cardet franchise. A typical buyer was set up under a rather patterned scenario. Initially, the victim either received an advertisement about Cardet at home or read a Cardet advertisement in the newspaper. These ads described Cardet's business of selling top quality consumer products and appliances. Cardet franchisees or distributors would be granted an exclusive sales territory wherein each month they would distribute brochures outlining selections of Cardet products to residents of the franchise area who could then order the Cardet products from the "convenience and comfort" of their own homes. For every order placed in the distributor's area a commission would be paid.

Cardet's advertisements exploited the relationship of former professional football player Dick Butkus with the company,*fn3 emphasized the great financial potential of Cardet franchises, and requested interested persons to send in an attached business reply card. Sometime thereafter, the prospect either went to a Cardet office or a Cardet representative appeared at his home. At that point various representations were made by the defendants and others to the prospective buyers: that Cardet was a national enterprise with offices in major cities like Atlanta, Chicago, Dallas, Houston, Los Angeles and Philadelphia; that Cardet had large distribution warehouses in Des Plaines and Northbrook, Illinois, both having a fleet of delivery trucks available; that Cardet had annual sales in excess of a million dollars; that former football player Dick Butkus had a major financial interest in Cardet; that Cardet franchisees generated large profits; that little, if any, cash investment by the franchisee was necessary; that Cardet provided the financing for the franchise; that the only collateral necessary for financing was the franchise itself; that franchisees were able to repay loans within a year of purchase; that Cardet provided franchisees with catalogs listing hundreds of items available; that Cardet conducted marketing studies for the franchisees to improve their distribution; that Cardet provided an extensive training program; that the products sold by Cardet included cosmetics, appliances, cars and yachts; that Cardet could sell its products, obtained directly from manufacturers, at a 50% discount; and, that a buy-back agreement allowed disenchanted franchisees to resell the franchises to Cardet at the market value. The defendants Serlin and Phillips actively participated in making these representations.

In fact, there was no nationwide network. Similarly, there were no Cardet offices in Atlanta, Dallas, Houston, Los Angeles and Philadelphia, no Des Plaines or Northbrook warehouses, no trucks, no profits, no marketing studies, no training programs, nor any contracts with product manufacturers to sell goods at a 50% discount. Butkus' only connection with Cardet was the license agreement giving Cardet the use of his name and image to promote its business. Franchisees were required under the loan agreements to use their homes as collateral. No franchisee could repay the loan within a year without incurring substantial prepayment interest charges. Of course, Cardet never repurchased any of the franchises from the disappointed buyers.

The evidence presented disclosed that the so-called business of the defendants had all the earmarks of a classic fraud. At the initial presentation the prospective buyer was shown "pitch books" in which appeared bogus letters from satisfied franchisees and other misleading promotional materials. The prospect was questioned about his personal and financial situation while photographs were taken of his home. Ostensibly the photos were to be submitted to Cardet demonstrating that the buyer had adequate facilities. Actually the home photos would be submitted to MLC to show that there was satisfactory collateral for the loan. The prospective buyers were never informed that their homes were to be used as collateral.

After an agreement on the sale of the franchise was reached, the victims were driven to the MLC loan offices in a new Lincoln Continental Mark IV. In many instances, representations were made to the prospect that they could purchase the same type of car from profits earned from a Cardet franchise. One witness testified that, pursuant to Serlin's request, he acted as a "set-up man"; that is, he would unexpectedly arrive during an initial sales presentation with prospective buyers and casually mention how well he had done in operating his Cardet franchise. Another witness related that the defendant Phillips expressed his philosophy of selling as follows:

"The way it is done in this business, you give them a little and then you take it away. Then you give them a little bit more and you keep taking it away. By the time they come in here to close, they are so anxious to give you their money that there is no difficulty in closing whatsoever."*fn4

After arriving at the loan office, the defendants and employees of MLC continued to proclaim Cardet as a great business venture. The loan papers were hurriedly presented for signing. Reading of the documents was discouraged. Misrepresentations were made about the nature of the collateral for the loan, the rate of interest, the amount of prepayment penalties, and the time in which the loan would be repaid. The buyers were never told that Cardet received a finder's fee for each loan. Although requests were made for copies of the loan papers, none were produced.

Suffice it to say, the franchisees failed. There were many incurred expenses but little or no profits. Numerous purchasers did not even receive merchandise. Their loans ultimately required a total repayment of approximately $9,000 on an initial principal amount of $5,000.

II. THE RECORD CONTAINS SUFFICIENT EVIDENCE TO SUPPORT THE JURY'S FINDING OF GUILT.

Despite the lengthy and detailed record in this case, which outlines the participation of the defendants in a scheme to defraud, the defense argues that there was insufficient evidence to establish the defendants' guilt beyond a reasonable doubt. This claim arises because much of the evidence, an estimated 80%, dealt with the MLC defendants and the loan transactions which were admitted to show their guilt. Since the MLC defendants were acquitted, the defendants argue they were prejudiced by this evidence.*fn5

However, the evidence would have been admissible against the defendants, regardless of the status of the MLC defendants, because the indictment charged an overall scheme or artifice to defraud. This case is analogous to a conspiracy trial in which the evidentiary rule is well-established that statements and acts of co-conspirators are relevant and admissible.

Justice Clark was confronted with this problem in United States v. Cohen, 516 F.2d 1358 (8th Cir. 1975). In Cohen, a mail fraud case, the facts were remarkably similar to the present situation. Justice Clark stated for the Eighth Circuit:

"Once the appellant contrived this scheme to defraud and set it in motion, he was engaged in a continuous offense of causing the mails to be used in furtherance thereof, an offense which is not mitigated by his mere physical absence. In general, proof of a mail fraud scheme involving two or more persons is analogous to the nature of proof in a conspiracy, see United States v. Grow, 394 F.2d 182, 203 (4th Cir. 1968), and the same may be said of withdrawal from a mail fraud scheme. An individual participant in a fraud scheme will be held liable for the acts of his agents and co-schemers that are within the general scope of the scheme, see United States v. Cohen, 145 F.2d 82 (2d Cir. 1944), unless as in a conspiracy, he undertakes some affirmative act of ...


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