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July 13, 2004.


The opinion of the court was delivered by: JAMES ZAGEL, District Judge


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 disclosed.

  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 acquittal.

  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 significant error.

  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 ...

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