Appeals from the United States District Court for the Southern District of Illinois, Springfield Division. No. 79-Cr.-3002 -- J. Waldo Ackerman, Judge .
Before Sprecher and Cudahy, Circuit Judges and Will, Senior District Judge.*fn*
Many volumes of the lengthy trial transcript were bound separately in several segments with identical labelling and pagination. We have numbered these volumes A, B, C, etc., to facilitate references to the record. E.g., Tr. XIA; Tr. XIB.
The five defendants*fn1 involved in these criminal appeals were indicted by a federal grand jury for conspiracy to commit mail fraud and 77 substantive counts of mail fraud arising out of the establishment of a farmers cooperative in southern Illinois. Defendants Derry, Shelton and Darrough were also indicted for income tax evasion involving the proceeds from their allegedly fraudulent scheme. 26 U.S.C. § 7201 (1976). After a lengthy trial, the defendants were all found guilty of conspiracy as well as some but not all of the mail fraud counts. The jury also returned a verdict of guilty with respect to the tax evasion counts. Defendants have raised numerous questions on appeal regarding the sufficiency of the evidence, the instructions, various evidentiary rulings and the propriety of their sentences. We affirm in all respects except as to defendants Burks and Bledsoe, whose judgments of conviction are vacated and remanded for resentencing.
I. The Farmers Cooperative Scheme
In what seems to be a bucolic variant of a "Ponzi scheme,"*fn2 the defendants sought out investors in 1975 who would buy stock in a management company, First National Management ("FNM"). FNM was then supposed to use the proceeds of the stock sale as a loan to establish the Illinois Farmers Marketing Association ("IFMA"), which was in fact a farmers cooperative. IFMA was to be further funded by long-term unsecured promissory notes sold to individuals and known as Harvester Agreements. The Harvester Agreements were 20 year loans by farmers to IFMA at a 7% annual rate of interest. Farmers could invest in IFMA by one lump-sum payment of $4,000, 3 annual payments of $1,400 or 20 annual payments of $360. In consideration of making these loans, the farmers became members of the cooperative and eligible both to sell farm products and to purchase supplies at facilities that would be established by the cooperative. Members also shared in a small percentage of the gross sales volume of the cooperative's stores. The capitalization for the cooperative was intended to be supplied by the Harvester Agreement loans together with a loan of $150,000 from FNM. FNM's stockholders were then expected to receive a return on their investment through management and consulting fees for services rendered by FNM to IFMA during the first six months of the cooperative's existence and through a share of FNM's 2% override of IFMA's gross sales. FNM's management and consulting fees were based upon a percentage of IFMA's receipts from the proceeds of the Harvester Agreement loans. FNM's shareholders assigned all these fees payable to FNM to Shelton, Darrough and Derry in a series of partial assignments. Gov't Exs. 87Q, 87R and 87S.
Both FNM and IFMA were successful at raising considerable sums of money. As time passed, however, investors became disgruntled over the apparent lack of progress towards the establishment of facilities for the cooperative. On March 22, 1976, this grumbling reached its peak. A meeting was held and new directors were added to the board of FNM to dilute the defendants' control. On March 23, 1976, the investors stormed the offices of the cooperative, broke down the door and seized the corporate records. As of March 23, 1976, the defendants' involvement in the scheme had effectively ended.
In retrospect, the most difficult problem in the entire arrangement from the point of view of investors was that the "management and consulting fees," sales commissions and expenses incurred during the first year left FNM and IFMA so underfunded that the grocery stores, grain elevators and meat packing plants supposedly planned by the cooperative remained an improbable, if not impossible, dream. The financial shortfall occurred despite the impressive sums of money that were raised by FNM and IFMA in a short time during 1975-1976. Thus defendants Darrough, Shelton, Derry and Fenoglio sold $222,000 in FNM stock.*fn3 Only $32,500 of the cash proceeds was actually loaned to FNM. But disbursements of over $125,000 to the defendants and other disbursements for operating expenses left FNM with a cash balance of $2,437 on March 26, 1976.*fn4 In addition, IFMA itself raised approximately $645,000 through the Harvester Agreement loans. Most of this money, $503,000, was paid out in sales commissions and consulting fees. Operating expenses consumed most of the remainder and IFMA had only $27,448 on hand when the scheme collapsed. Over $830,000 was paid out by FNM and IFMA in less than a year with little or nothing to show for the expenditures. The roles of the five defendants involved in this appeal in this financial disaster will be detailed further as we consider the sufficiency of the evidence with respect to each defendant.
II. The Sufficiency of the Evidence on the Conspiracy Count
The crime of conspiracy is an agreement to violate the law. United States v. Craig, 573 F.2d 455, 485 (7th Cir. 1977), cert. denied, 439 U.S. 820, 99 S. Ct. 82, 58 L. Ed. 2d 110 (1978). Such an agreement is rarely susceptible of proof by direct evidence but may be inferred from circumstantial evidence. Glasser v. United States, 315 U.S. 60, 80, 62 S. Ct. 457, 469, 86 L. Ed. 680 (1942). The defendants in the instant case were charged with conspiracy to commit mail fraud. 18 U.S.C. § 371 (1976). This offense requires that the fraudulent scheme be the object of the conspiracy and that it be reasonably foreseeable that the mails will be used in furtherance of the scheme. Craig, 573 F.2d at 486.*fn5
a) Defendants Burks and Bledsoe
Our melancholy tale begins with the exploits of defendants Burks and Bledsoe, for it was by dint of their entrepreneurial efforts that this fraud came to Illinois. Like most successful frauds, the farmers cooperative scheme had been used before. Thus, from 1972 to 1977, a similar farmers cooperative scheme operated in Missouri, Oklahoma and Arkansas.*fn6 Defendants Burks and Bledsoe were particularly involved in the operation of the Progressive Farmers Association ("PFA"), the Missouri counterpart of the IFMA.
In late 1974, Burks contacted an acquaintance in Illinois, James Fenoglio, about a possible business venture. Defendants Burks and Bledsoe then flew to Illinois and presented the farm cooperative idea to Fenoglio based upon the purported (but illusory) success of PFA in Missouri. Burks and Bledsoe agreed, for a fee of $50,000 due in two installments of $25,000 each, to help Fenoglio establish an Illinois cooperative. Personal problems prevented Fenoglio from acting on the idea, however, at that time.
In March of 1975, Burks contacted Fenoglio again and indicated that he had two people to "help" Fenoglio get the Illinois cooperative off of the ground. Burks sent defendants Shelton and Darrough to "help" Fenoglio although Fenoglio quickly assumed a secondary role in the Illinois venture.
Burks and Bledsoe agreed to assist Fenoglio in setting up the Illinois farm cooperative. As stated in their agreement:
(o)ur assistance will be in the nature of setting up your administrative offices and all the procedures necessary for a smooth functioning operation. We will hold your first sales training school and your first sales meeting. We will be available during the first twelve months for consultation and advice as needed to properly build your organization. Our fee for this service will be a total of $50,000.00 in cash; $25,000.00 payable upon the completion of your stock offering in the management and consulting corporation. The other $25,000.00 will be due and payable by the Co-op upon the completion of issuing 500 instruments.
Burks and Bledsoe supplied examples of various PFA documents including the sales "pitch book" used to persuade farmers to loan money to the cooperative. This pitch book contained numerous misrepresentations regarding, inter alia, the safety of the farmers' investment, its alleged "deposit" characteristics and the rate of return for farmers who did not continue to make the annual $360 loan to the cooperative. The IFMA virtually copied the PFA documents and pitch book supplied by Burks and Bledsoe.
Burks also addressed two meetings of FNM investors and IFMA salesmen. He glowingly described the PFA operations in Missouri and falsely stated that PFA investors had just received a dividend of $148.00. Tr. IIID at 35. At that time, PFA was losing money at a considerable rate and had not paid any dividends. Burks argues that he was unaware of the magnitude of PFA's losses and that PFA's financial statements actually revealed a profitable operation. These statements were based upon a surrealistic accounting system, however, whereby borrowed capital funds from the Missouri counterpart of the Illinois Harvester Agreements were treated as "income" with no resultant increase in PFA's liabilities. Certainly, there were no profits based on anything even the most "creative" accountant would reasonably regard as "income" and "expenses." We believe that the jury could have inferred, based upon Burks' position as President of PFA, that he was quite aware of PFA's precarious financial status. See also Gov't Ex. 83T-3 (PFA financial statement of March 1975 with Burks' name on it).
In addition, Burks stated in 1977 to a Missouri law enforcement officer that PFA had been forced to issue stocks and bonds because the proceeds of the promissory notes all went out in commissions and PFA had insufficient funds to keep the business operating. Tr. XIB at 85-86. Although this statement occurred after Burks' representations to the meetings in November of 1975, the sale of PFA stock that Burks was describing took place prior to September of 1975. The jury could have inferred from Burks' admission that he was aware of PFA's financial trouble prior to November of 1975 and that he thus falsely represented in the November meetings that PFA had had an enormous growth in assets, Tr. IIID at 25, that PFA was "profitable," Tr. IIID at 25, that PFA provided a "fast return" on investments, Tr. IIID at 25, and that an investment in the Illinois venture was as "safe as gold." Tr. IIID at 34.
Burks also responded to an inquiry from the Illinois Attorney General's office before the scheme collapsed by indicating that Darrough and Shelton had once been representatives of PFA. Gov't Ex. 83G. In late 1976, however, Burks told an IRS agent that Shelton and Darrough had never worked for PFA. Tr. XVI at 112-14. Burks' earlier statements to the contrary may have been designed to corroborate the similar representations made by Shelton and Darrough to Illinois investors and thus to frustrate the Illinois investigation into the cooperative.
With respect to defendant Bledsoe, Bledsoe stated in September of 1975 that PFA had changed from a non-stock to a stock cooperative to prevent PFA from going broke. Tr. XIC at 22. Bledsoe was thus even more clearly aware of PFA's financial problems in September of 1975 than was Burks. This is not surprising given Bledsoe's position as a "consultant" to PFA and one of the four men who shared PFA's "consulting fees." We also note that Bledsoe was involved in the preparation of PFA's financial statements. Tr. XIC at 8-13.
Bledsoe was also the principal liaison between himself and Burks and the IFMA operation with respect to the development of the various documents essential to IFMA. Tr. XIA at 86. In connection with Bledsoe's efforts in this regard, he proposed using an offering letter in Illinois to accompany the sale of each Harvester Agreement with disclosures as to the nature and risk of the IFMA investment. When IFMA's attorney responded with an offering letter that was more explicit, however, Bledsoe discouraged its use because it was "too descriptive of the potential risk."*fn7 Bledsoe did appear to acquiesce when the IFMA attorney stood firm regarding the use of the more explicit offering letter. Tr. XD at 20-21.
With respect to both Burks and Bledsoe, we also think it important that they supplied Shelton, Derry and Darrough with the PFA consulting agreement, Gov't Ex. 83L, which was virtually an exact model for the Illinois counterpart. This similarity is particularly probative of a conspiratorial agreement between Burks and Bledsoe and the other defendants because this document pertained to the sole source of even potentially legitimate financial returns to Shelton, Derry and Darrough from the Illinois operation. The form of the consulting agreement would have certainly been a topic of discussion among the conspirators and the jury could have used this evidence as one basis to infer an agreement among the defendants. In return for their consulting services to the Illinois operation Burks and Bledsoe together received $25,000.
Finally, defendant Bledsoe directed John Weston Chase, PFA Secretary-Treasurer, to show Illinois investors around the PFA operation in Missouri. Given the constant comparison by both Burks and Bledsoe of the potential development in Illinois to the presumed actual development of PFA in Missouri and the use of similar comparisons by Shelton, Derry and Darrough to entice Illinois investors, it was essential that Illinois investors have the opportunity to view the PFA facilities. These tours, which Bledsoe made possible despite the absence of any provision for them in the Burks-Bledsoe/Fenoglio agreement, were necessary to facilitate IFMA's efforts to sell Harvester Agreements and FNM stock.
Based upon all of the above evidence, we feel that the jury could have inferred that Burks and Bledsoe agreed to help Shelton, Derry*fn8 and Darrough defraud Illinois investors through the use of the FNM/IFMA investment scheme. The jury could have inferred that Burks and Bledsoe agreed to sell Shelton, Derry and Darrough the unsound PFA concept with the potential for lucrative personal returns through the FNM/IFMA consulting agreement. Burks and Bledsoe also assisted the other three defendants in selling the fraudulent concept to Illinois investors through various misrepresentations about the success of the Missouri operation.
b) Defendants Shelton and Darrough
Our conclusion with respect to Burks and Bledsoe clearly requires that we uphold the jury verdict with respect to defendants Shelton and Darrough on the conspiracy count. We will elaborate further, however, only to illustrate how much additional evidence was presented with respect to Shelton and Darrough that could sustain the jury's verdict.
Shelton and Darrough received numerous checks from both FNM and IFMA during the life of the scheme. These checks were generally for less than $5,000. Shelton actually requested that large disbursements be made by a series of smaller checks. When all of these checks were totaled, Shelton and Darrough had each received exactly $93,383.50. For this to be mere coincidence in the face of the lax bookkeeping system of FNM and IFMA would be most improbable. Rather, we feel that the jury could have concluded that Shelton and Darrough agreed to pursue the scheme together and on an equal basis. This agreement, coupled with the numerous misrepresentations indicative of fraudulent intent*fn9 made by both Shelton and Darrough during the operation of the scheme, constitutes sufficient evidence to sustain their conspiracy convictions.
Shelton and Darrough also participated in an attempt to block a state investigation into the farmers cooperative by bribing a state official. In January of 1976, the defendants learned of the state investigation. Shelton told Fenoglio to contact defendant Ernest B. Dinora, a friend of Fenoglio's, to see if something could be done to halt the investigation. Fenoglio later informed Shelton, Darrough and Derry that Dinora would require at least $8,500. Shelton and Darrough then each wrote a check to Fenoglio for $4,250. Fenoglio cashed the checks and reported that the money had been given to Dinora. Dinora testified that he had passed the money on to his brother. His brother made an attempt to secure information about the investigation and reported that the defendants were in a "bushel of trouble." Even though no evidence was introduced that a bribe was actually offered to any state official, we feel that the jury could have relied on this evidence to conclude that Shelton and Darrough were engaged in a conspiracy to operate the cooperative in a fraudulent and illegal manner.
Derry argues that whatever else was going on, he was not involved in the fraudulent scheme. Derry emphasizes the testimony in the record suggesting that Derry was a "bystander" ...