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United States v. McNamara

July 12, 1937


Appeal from the District Court of the United States for the Eastern District of New York.

Author: Manton

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

MANTON, Circuit Judge.

The indictment charged appellants in twenty-four counts with devising a scheme and artifice for obtaining money and property by means of false and fraudulent pretenses in connection with the sale of guaranteed first mortgages and guaranteed first mortgage certificates issued and sold by the National Title Guaranty Company and with using and causing the use of the United States mails in the accomplishment and execution of this scheme. The twenty-fifth count charges a conspiracy to use the mails in furtherance of the scheme to defraud. Appellants were convicted on the twenty-fifth count only.

The National Title Guaranty Company was organized in 1924 with a capitalization of $150,000, which was gradually increased until in 1929 the total stock issued was $3,039,900. By the New York statute it was under the supervision of the Insurance Department of New York, which in November, 1932, approved a reduction of the capital to $1,013,300. Its business consisted of searching and insuring titles to real estate and of guaranteeing real estate mortgages and mortgage certificates as to principal and interest.

Appellant Miller was one of its organizers, its president until February 10, 1932, and a member of the board of directors from organization until October, 1932. He was its counsel until the latter date. McNamara was a director throughout the existence of the corporation and at times treasurer, vice president, and, when Miller resigned, February 10, 1932, he became and remained its president. He was experienced in the real estate and mortgage business before his association with this corporation. Warren's connection with the corporation started in November, 1931, as a director, and later as vice president and treasurer and a member of the executive committee. He had been a real estate expert of many years' experience and a bank president. Warren assisted Miller and took over some of the latter's duties in December, 1931. All appellants were active participants in helping and making sales of mortgages and certificates.

The corporation prospered until the depression set in, and then, in common with all title and mortgage concerns, it felt its effect and suffered serious losses. Like other similar concerns, this corporation was taken over by the Insurance Department of the state August 2, 1933. Between October, 1929, and August 2, 1933, it carried on its business hoping that it might survive the financial stress and storm of the depression.

The crimes charged are based on alleged false and deceptive representations by means of which mortgages and certificates were sold to alleged victims. Appellants are said to have caused misleading advertisements, pamphlets, and financial statements to be circulated for the purpose of making sales. The representations in substance were that their mortgages and mortgage certificates gave the soundest form of investment.These mortgages and certificates were secured by liens on real estate backed by the guaranty of the corporation. Real estate values shrank severely and the guaranty of the corporation was affected by its losses and ultimately by the action of the State Superintendent of Insurance in undertaking its liquidation.

The judgment of conviction requires only a review of the conspiracy charge. The court's charge allowed the jury to find that on and after October 1, 1929, the appellants intentionally devised a scheme to defraud and consummated their fraud by certain overt acts. The instructions correctly advised the jury that the offense charged consisted of two elements: First, a scheme devised or intended to be devised to defraud; and, second, use of the mails in the execution or attempted execution of the scheme. In defining a scheme the jury was told that deliberate and express agreement was not necessary; it was not encumbent upon the Government to show that a round-table conference was held wherein a plan of action was formulated and the details of a plan were agreed upon; it would be sufficient if there was a "tacit agreement or concerted action." After all, the appellants were high officers of the company, they dictated its policies and its course of business. Any intentional combination on their part, though not expressly agreed upon, to defraud the public would be sufficient. It was required, however, that the government should prove that the scheme or combination was wilful and intentional, that appellants deliberately worked together in the accomplishment or attempted accomplishment of a fraudulent purpose, and that overt acts were performed by one or more of the conspirators in furtherance of the common objective. A wrongful intent might be implied from the intentional doing of wrongful acts. On all these matters the jury was properly instructed.

The character of the business conducted by the corporation was adequately described to the jury. It dealt with real estate mortgages and guaranteed them to purchasers both as to principal and interest; the sales of the mortgages constituted the largest block of its transactions, but it also issued certificates which represented participations in single mortgages or groups of mortgages. The charge made against the appellants centers largely about the sales of these certificates. In 1932, for example, there were outstanding guarantees against whole mortgages in the sum of upwards of forty millions; there were outstanding certificates against whole mortgages of nearly two millions, and certificates issued against group mortgages aggregated only $107,000.

A charge of fraud is made in that condensed financial statements were issued in 1929 and 1930 which did not correctly reflect the condition of the corporation.There is no accusation of falsity, but it is contended that the statement did not go far enough in fully clarifying the character of the year-end financing with the Bank of Manhattan Company which was intended to reveal a liquid position which the company did not in fact possess. It is said that in the books of account of the corporation these transactions had been entered under incorrect captions. Under one caption showing "Contingent Liabilities" were noted "Special Guarantees," and after that in parenthesis were the words "Notes Payable." This represented loans from the Bank of Manhattan Company for which mortgages owned by the corporation were assigned as collateral. These loans were negotiated at the end of each year, for four years beginning with 1927, for the purpose of refinancing bank obligations. They were temporary in character, of several days' duration, repaid, and the mortgages reassigned to the corporation. The transaction did not pad the cash position of the company; the moneys which came from the Bank of Manhattan Company were deposited in the company's bank account and used to anticipate the loans had with other banks. The company did not have to pay these bank loans, but at the beginning of each year, having thus secured renewal of its credits from other banks, it carried out its repurchase agreement and took the mortgages back which had been assigned as collateral.

The entries so made were by the accountant but in 1930 Miller, as president of the corporation, asked its counsel's advice as to this method of representing the transaction and upon his advice it was changed that year. On the liability side there was set up the exact amount received from the Bank of Manhattan Company and the amount of guarantees was increased. A vice president of the bank testified that the sales of these mortgages, though made under a repurchase agreement, were actual and bona fide and that in the bank's ledger these transactions were carried in the mortgage account. Neither method of dealing with this accounting problem made any change in the net worth or in the financial responsibility of the corporation. Compare, Pelz v. United States, 54 F.2d 1001 (C.C.A. 2). The corporation dealt with one of the principal banking institutions of the city. Particularly significant in its bearing on the question of a conspiracy to defraud is the fact that identical transactions were carried on in the company's most prosperous years. The evidence is inadequate to brand the transactions or the statements which reflected them as a fraud.

Undoubtedly from 1930, and particularly so from 1932, to the date the corporation was taken over by the insurance department, it was hard pressed to meet its guaranty obligations. The court below correctly stated to the jury that from the earlier year it began to show losses. That, however, does not justify the inference that it had become a financial bubble which was kept from bursting only by adroit and dishonest manipulations. It is common knowledge that when other investments had collapsed, the real estate market was looked upon as a more reliable -- relatively at least -- channel of investments for trustees and others. It is significant that the corporation continued to meet its guaranteed interest obligations until March 1, 1933, just prior to the date of the bank holiday.

But it is said that the conspiracy of which the appellants have been found guilty is supported by proof of a wilful and intentional scheme to wilfully and intentionally defraud. To support the conviction of conspiracy based upon a willful and intentional scheme to defraud, the government points to the alleged false and deceptive manner, amounting to fraudulent representations, by which the certificates and mortgages were sold to the investing public, to the fact that investments were advertised as the ...

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