United States District Court, N.D. Illinois, Eastern Division
July 13, 2004.
UNITED STATES OF AMERICA,
PAUL VAN EYL.
The opinion of the court was delivered by: JAMES ZAGEL, District Judge
MEMORANDUM OPINION AND ORDER
This fraud trial began with twelve counts, all but two of which
ended in a hung jury. Defendant Paul Van Eyl was convicted of
wire fraud and false statements to the SEC. The mistried counts
included substantive counts of securities fraud, bank fraud and
false statements to a financial institution. Van Eyl now moves
for a judgment of acquittal, and, alternatively, for a new trial.
Motion for Judgment of Acquittal
That there was a criminal fraud is not in dispute. A company
called First Merchants Acceptance Company ("FMAC") conducted
business in the subprime loan market. FMAC was publicly listed.
It had a loan portfolio on which it collected payments. A good
deal of its business performance was judged on its ability to
collect on the loans. The President of FMAC, Mitchell Kahn, a
co-defendant in this case plead guilty and testified to various
ways the company used to make its books look better than they
should have. The idea was to manipulate the delinquency and
charge-off rates on its loan portfolio during a certain period of
time. Fewer delinquencies and fewer writing off of loans make a
loan portfolio look better.
No single technique was used. Where an auto loan had failed and
the vehicle was repossessed, the loan was kept on the books at
its full value instead of the lesser value that proper accounting and FMAC's own procedures required. When a borrower
disappeared and could not be found, the loan was not written off
completely as it should have been, but was discounted by only 45%
of its value. The accounts of those who were delinquent but whose
property had not been repossessed and who had not "skipped" into
the land of unfound, should also have been discounted but were
not. The technique here was to give deferments to such borrowers.
Deferments are legitimate devices used by lenders who believe
that a borrower has fallen behind in payments because of some
temporary hardship. To give the borrower a chance to set things
right, the borrower is offered a deferment. Usually a deferment
is given only after obtaining the signed deferral from the
borrower who pays a deferment fee. FMAC policy (which, I infer,
was common in the business) was that deferments were not offered
to persons who were more than one or two payments behind.
Contrary to this policy, however, deferments at FMAC were given
to many who did not sign agreements (and may not have even been
informed of them) and who were too delinquent to qualify for
them. The end result of granting these deferrals was that
delinquent accounts were converted into current accounts. None of
these things should have been done although many of them were
remedied before SEC reporting periods and the deferrals were
Although Van Eyl really had little to do with the required bank
and government filings at issue here,*fn1 a reasonable jury
could find that he knowingly participated with Kahn in a scheme
to cook the books of FMAC to keep the stock price of FMAC shares
high. Van Eyl was a high-ranking employee of FMAC, in essence
Kahn's right hand man. A jury could find beyond a reasonable
doubt that a small number of FMAC employees under the leadership
of Kahn and the supervision of Van Eyl invoked practices which produced
misleading numbers and then gave these numbers to various
unsuspecting employees and outside professionals who used them to
comply with the company's various obligations to report to banks,
the SEC and others. Therefore, I deny the motion for judgment of
Motion for New Trial
The vexing problem of this case is the motion for a new trial.
I have taken an exceptionally long period of time to deal with
this matter, partly because, until recently, I had some small
expectation that a plea agreement could be reached, partly
because I needed to examine portions of the trial transcript, the
preparation of which was delayed, and partly because the question
of a new trial is a close one.
Van Eyl never disputed the facts about what was done at FMAC.
His defense was that he was "a 28 year old kid" without legal or
accounting training who followed the lead of Kahn, a lawyer, and
that financial officers in the company and outside auditors went
along with the accounting. Van Eyl's defense was, in short, that
his intent to defraud had not been proven. The defense was not
"believe me, I did not know"; it was "the prosecution did not
prove I knew." He presented no affirmative evidence that he
lacked intent or knowledge that the accounting practices were
fraudulent, and he never testified or offered any affirmative
evidence that he had no intent to defraud. Although the fact that
he did not testify cannot result in any inference of guilt,
Griffin v. California, 380 U.S. 609 (1965),*fn2 Van Eyl's
method of defense has to be weighed for what it is against the prosecution's case in chief in
deciding whether the basis for this motion for a new trial the
prosecutor's alleged improper rebuttal argument was a
In general, the prosecutor's argument was effective. He refuted
the suggestion that Van Eyl did not know his conduct was wrong by
pointing out that other FMAC employees with whom Van Eyl
regularly dealt knew it was wrong. For example, the prosecutor
pointed out that Steve Zemaitis sought to transfer to another job
at FMAC because "he could recognize right from wrong." The
prosecutor further pointed out that Rich Zielinski, Brian Hake,
and Norm Smagley all could tell that FMAC's reported delinquency
and charge-off rates were fraudulent. Moreover, he noted that the
Audit Committee of the Board ordered an investigation into the
delinquency and charge-off rates because it too thought there was
fraud. Finally, he noted that the Board itself eventually fired
Van Eyl because of the fraud. In short, the prosecutor argued
that if everyone else could see a fraud, then Van Eyl saw it too.
The problem with the evidence elicited by the prosecutors in
their case in chief is that not one of these FMAC employees ever
told Van Eyl that the manipulation of the delinquency and
charge-off rates was a fraud. This issue was raised before trial,
and I precluded the prosecution from introducing the opinions of
these witnesses that something was very wrong at FMAC. I limited the use of their opinions only to those situations in
which the opinions were essential to explain the actions taken by
the witnesses and for only that limited purpose.
When the prosecutor violated that in limine ruling during
closing argument, I overruled the objection. While the objection
was not as full as it should have been, not as sufficient as it
could have been, and perhaps deficient in giving me all the
information I needed, I am reluctant to find waiver because I did
understand the objection to refer to the form of argument that
was being made. I overruled it, I recall, because I thought the
door had been opened by the defense argument and, more
importantly, because I thought the focus of the argument would be
on the testimony of Peter Gorman.
After further consideration, however, I think the door had not
been opened. Substantially, the focus of the defense argument was
not that others thought everything was all right; rather the
focus was that Van Eyl was not told it was wrong. The
prosecution was not forced to make the argument it did in
rebuttal. There was ample evidence that no single person other
than Van Eyl, Kahn and perhaps Thomas Ehmann (the CFO) knew all
the details of the different ways in which the numbers were being
manipulated. Procedurally, the prosecution did not seek a ruling
from me that the defense argument had waived its right to rely on
the in limine ruling.
The truth is that the witnesses believed the accounting was
wrong, or contrary to FMAC policy. The prosecution notes this
very point that these witnesses usually used words like
"right," "wrong," "true," "false," and "fraud." It argues that
these witnesses were not offering legal opinions. This is not a
bad theory. It mutes the force of Van Eyl's argument that he was
prejudiced with opinions not admitted under Rule 701. But my
ruling was to exclude the moral as well as the legal opinions of
the witnesses, which is acceptable to do. See United States v. Pollard, 959 F.2d 1011, 1037 (D.C. Cir. 1992) (equating moral
opinions with legal opinions); Washington v. United States,
390 F.2d 444, 455 n. 31 (D.C. Cir. 1967) (same).
The prosecutor should not have made this argument. It was
powerful and persuasive, and it is impossible for me to conclude
that it, standing alone, did not affect the verdict. But perhaps
it did not stand alone. Peter Gorman did testify that he thought
the practices were illegal and that he confronted Van Eyl with
his opinions. This evidence showed that someone, who was subject
to cross-examination, did tell Van Eyl that the practices were
illegal. If this evidence is strong enough, then it may be that
the argument about what Zielinski and others thought is not all
that significant and indeed harmless error.
Peter Gorman was, at least at the time he testified, a very
experienced manager of collections. At FMAC he was vice-president
of collections and reported to Kahn. He thoroughly understood
FMAC's policy governing charge-off of loans. In fact, he wrote
the policy on deferments which included the requirement of a
signed deferral agreement. Gorman oversaw collections but he did
not oversee charge-offs nor did he have the power to charge off
or defer an account. Van Eyl oversaw that.
In early September, Gorman was present at a meeting to discuss
a new deferment program which Van Eyl presented. Immediately
after the conference, he went to Van Eyl's office. At trial, he
testified as to what happened there:
Q. What did you say to him?
A. I told Paul I felt uncomfortable. I felt it was,
you know, didn't make sense to me. I didn't feel
comfortable with it. You know, Paul responded that it
was a common practice within the industry.
Q. Did you respond?
A. Yes. I felt that that was not true. I said, Paul,
I said, I don't believe that is true. I think we are
updating accounts and this is definitely wrong, and I
think that somebody is going to have some issues at the
Securities and Exchange Commission, is going to have
issues with this and in my mind somebody is going to
go to jail for this.
Q. You said those things to Paul Van Eyl?
A. Yes, I did.
Q. What did he do?
A. He looked at me and, I believe, mentioned that I
wasn't a team player and then left his office and
walked down the hall to Mitch Kahn's office and they
closed the door.
Standing alone, this is quite damning testimony on the question
of Van Eyl's conduct with respect to the deferment program. The
fact that Van Eyl ended the confrontation by walking out of his
office to see Kahn matters as well since Kahn testified that he
and Van Eyl were co-conspirators in the fraud.
Gorman did not resign, however. He did not work on nor did he
hear of the mass of deferrals that were made in the last months
of 1996. He continued to work in collections along with another
man who, in October, was assigned to "split" Gorman's job with
Gorman. In December, Gorman resigned in a meeting with Kahn, but
Kahn persuaded him to stay on and go to Nashville, Tennessee
where FMAC had a collections center. Gorman was there until
mid-March when he returned to corporate offices. On April 1, he
was let go and told his job had been eliminated.
Gorman was impeached by omissions from the FBI report of his
interview, which Gorman conceded was an accurate report. The
cross-examination went this way:
Q. Is that an accurate summarization of what you told
the FBI in November of 1997, as best you can recall?
A. Yes, I believe it was.
Q. And nowhere in that report does it say that you
told the FBI that in November of '97 that Paul Van
Eyl went down to Mitch Kahn's office after that
A. I can't remember. I mean Q. No, the question is, the report doesn't reflect
your saying that, correct?
Q. Now, I was taking down notes during this
conversation I heard you on direct say that Paul Van
Eyl said two things to you. One, deferrals are common
practice in the industry, is that your testimony?
Q. And, two, you claim he said "I wasn't a team
Q. Go back to that FBI 302 report. Go back to that
report of your interview, sir.
* * *
Q. You never told the FBI, in November of '97, that
Paul Van Eyl said, "You are not a team player,"
A. To be honest with you, I can't remember whether I
did or didn't.
Q. Okay, but you said you have reviewed this report
and it is an accurate summation, correct?
A. I believe it is an accurate summation.
Q. And, according to the report, you didn't say that,
A. If it doesn't show in there.
* * *
Q. Mr. Gorman, would you turn to page four?
Q. In that paragraph, sir, did you, according to this
report, did you tell the FBI that after the meeting
adjourned Gorman told Van Eyl that he was
uncomfortable with the program. Gorman told Van Eyl
that this program was clearly a violation of
securities laws and that the Securities and Exchange
Commission may someday investigate this matter,
Q. And Gorman specifically told Van Eyl that in
Gorman's opinion someone is going to go to jail for
Q. Now, did you then also tell the FBI that Gorman
remembered that Van Eyl turned pale upon this
Q. And, sir, did you tell the FBI that he said he
told Gorman that these accounting procedures are
perfectly acceptable isn't that what you told the
FBI he said?
Q. And then you responded you responded, that's
bullshit and you know it. That is what you said in
November, right? A. Yes.
Q. Now, sir, when you testified today you didn't tell
the jury that Paul Van Eyl told you that these
accounting procedures are perfectly acceptable, did
you did you?
A. I believe I mentioned that he felt that they were
Q. You were talking about deferrals there, sir. Here
is my question. Did Paul Van Eyl tell you on this day
when you raised your concerns that in his mind these
accounting procedures were perfectly acceptable? Did
he tell you that, sir?
A. Yes, he did.
There was other cross-examination which established that Gorman
did not relate any of his concerns to other FMAC officers, the
general counsel, the outside auditors or the Board of Directors
all of whom were easily accessible to Gorman on one or more
occasions. Gorman also admitted that he did not possess expertise
in securities law.
The re-direct focused on the fact that Gorman did tell Kahn of
the problems. As he testified, "I told him I felt that the way
the company was being run and things he did [referring to the
deferral program], I didn't feel comfortable with and wanted to
leave the company."
Re-cross was short:
Q. Let me see if I got this right. So now it is
December, three months four months later you go to
Mitch Kahn and you say, you know what, everything is
improper around here, right?
A. No, I just resigned because I didn't feel
comfortable being with that company.
Q. So then he says, why don't you take this demotion
and go down to Nashville?
A. He asked me to stay. He said, Peter, give me some
time to get this thing fixed up and would you please
go down to Nashville, and I said, yes, Mitch, I will.
Q. And you said, okay, great, thanks?
A. I did. I said, yeah, I will.
Most of Gorman's testimony is phrased in terms of being
"uncomfortable" with what was happening. This feeling could
encompass everything from criminal misconduct to management style
to choice of office furniture and all the policy and practices in
between. It is simply not clear what Gorman meant. That he thought the company was badly
run on a number of fronts is clear from his testimony, and it is
clear that he was right.
One could reasonably interpret Gorman's statement as a clear
warning that the deferral policy was criminal. But one could just
as reasonably interpret it in other ways. He did not resign from
an enterprise which he thought was criminal until months later
and then was easily talked out of it by a man whom he believed to
be in on the misconduct. This allows an inference that he thought
it was mismanagement and not crime that was at hand Moreover, he
was in profound disagreement with Van Eyl's program which was in
violation of the policy he had authored. In corporate turf
battles, it is not uncommon to allege that your opponent's
program would be illegal. The accusation has more force than
simply saying something is foolish, short-sighted or bad business
much like legislators who say a bill is "unconstitutional" as a
substitute for simply saying that they don't agree with the
proposal. Finally, Gorman never used words like "Securities and
Exchange Commission" or "jail" again, perhaps because, as a
non-expert, he was not so sure of his ground in the face of Van
Eyl's assertion that the practice was legitimate.
One could legitimately argue that there is not a scrap of
evidence that Van Eyl ever, after his conversation with Gorman,
brought the issues to the attention of the general counsel, the
outside auditors, the board of directors or any other person not
involved in the decision to go ahead with the practice. This is a
fair comment on the evidence and not a comment on the defendant's
silence. It is a decent argument but, even if voiced, it does not
overwhelm the defense or cancel out the improper prejudice that
arose from the earlier argument that violated my ruling in
limine. Therefore, I grant the motion for a new trial.*fn3 For the reasons above, Van Eyl's Motion for Judgment of
Acquittal is DENIED, but his Motion for New Trial is GRANTED.