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United States v. Fauls

September 6, 1995

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,

v.

JOHN L. FAULS, III, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 CR 80--James B. Zagel, Judge.

Before CUDAHY, RIPPLE, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

ARGUED MAY 19, 1995

DECIDED SEPTEMBER 6, 1995

John Fauls was an experienced securities broker who worked for Howe Barnes Investment, in Chicago. In the fall of 1986, Robert Burstein, a friend of Fauls', commented to Fauls how much he liked Fauls' new Mercedes automobile. Fauls replied that there was a way that Burstein could have the Mercedes. Thus began their criminal relationship.

Factual Background

Fauls met Burstein in a business context in 1981. Burstein was the vice-president for investments and portfolio manager of Security Benefit Life Insurance Company in Topeka, Kansas. Part of Burstein's duties at Security Benefit involved trading bonds and other fixed income securities. During the next several years, the two became close personal friends. Over this time, Burstein confided in Fauls that he felt under-appreciated and, more importantly, under-paid by Security Benefit.

As a result of his dissatisfaction, Burstein left Security Benefit in the spring of 1985 to manage the fixed income portion of Union Carbide Corporation's pension fund. In this position, Burstein continued to use Fauls as a securities broker. To defend itself against a takeover, Union Carbide spun-off the management of its pension funds to a separate corporate entity, Benefit Capital Management Company (BCMC). Burstein became the vice-president and treasurer, as well as a member of the board of directors and executive committee, of BCMC.

Yet this new success was not sufficiently satisfying for Burstein; he still felt under-paid. And it was at about this time that Burstein commented on the Mercedes. Fauls responded that he would give the Mercedes to Burstein as a first payment in return for Burstein using Fauls to execute a set amount of trades for BCMC. They agreed that future payments would also be made. Burstein agreed; to cover up the Mercedes deal, Burstein gave Fauls a check for $10,000, and Fauls gave Burstein $10,000 cash.

Realizing that Burstein was not satisfied with his position with BCMC, Fauls put Burstein in contact with a long-time personal friend of his, James Wells, who had recently purchased Cosmopolitan National Bank in Chicago. For some time, Burstein had wanted to sit on the board of directors of a bank, and, after meeting with Wells, Burstein received a seat on the board. Burstein also purchased approximately three percent of Cosmopolitan's equity. Consistent with common practice, Burstein continued in his position with BCMC while serving as a director of the Cosmopolitan Bank.

In January 1987, shortly after joining Cosmopolitan's board, Burstein began advising Cosmopolitan with respect to securities trades that the bank executed through Howe Barnes. Initially, these trades were successful (Cosmopolitan made approximately $75,000 on the initial shortterm trades), and therefore Cosmopolitan agreed to pay Burstein (through a shell corporation nominally held by Burstein's wife) ten percent of the future trading profits that Burstein advised. However, the success streak came to an end. The next two trades that Burstein recommended were unprofitable in the short term, and therefore Cosmopolitan was forced to take the securities into its inventory. Because of the size of the trades, $10 million in total, Cosmopolitan was unable to add to its inventory of securities, forcing Burstein to execute only "day trades." *fn1

But this didn't stop Burstein from trading. Instead, he and Fauls devised a scheme, using Burstein's positions at BCMC and Cosmopolitan, to assure that Cosmopolitan's trades would be profitable. They used two methods to rig the trades. The first is what the government called "interposition" trades. With these trades, on days when the market went up for a security being sold by Burstein on behalf of BCMC, rather than simply having BCMC sell on the open market at the highest price, Fauls would create trading tickets to make it appear that BCMC had sold to Cosmopolitan at a lower price earlier in the day, and that Cosmopolitan then sold to the market at the higher price later in the day.

The second type of rigged trades were called "allocation" trades. With these trades, Fauls would purchase a security at the beginning of the day without designating the purchaser. Then, if the market price for the security rose, Fauls would sell it and allocate the gain to Cosmopolitan by indicating that Cosmopolitan had bought the security at the beginning of the trading day. If the price fell, Fauls would allocate the trade to BCMC, which would then take it into its inventory.

Fauls and Burstein continued this pattern of trading throughout 1987 and 1988. In addition to the trade rigging, Fauls continued to make payments, monthly at some points, to Burstein for using Fauls as a broker for BCMC trades. The last bribe was in the form of an extra $5,000 that Fauls paid to Burstein for a fishing boat. This occurred in the fall of 1990. In total, Fauls paid Burstein approximately $200,000. To explain why they stopped the bribery scheme, Burstein gave the following explanation:

A: By that time things at Benefit Capital Management Company had really changed dramatically and my need and desire for that cash was not as great as it was when it began.

Q: When you said things at Benefit Capital Management had changed dramatically, what was your salary by late 1990, if you recall?

A: Okay. By late 1990 my salary was probably in excess of $150,000 a year plus bonus. In addition we were busy in dealing in other areas as well, ...


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