The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.
In a 24-count superseding indictment, the government charges defendant Roy William Harris with conspiring to violate the wire fraud statute, 18 U.S.C. § 1343, and the bank fraud statute, 18 U.S.C. § 1344. The government also charges Harris with substantive violations of § 1344; the money laundering statute, 18 U.S.C. § 1956(a)(2); the wire fraud statute, § 1343; making a false statement to a bank in connection with a loan, in violation of 18 U.S.C. § 1014; and participating in a continuing financial crimes enterprise, in violation of 18 U.S.C. § 225. Lastly, the government prays for criminal forfeiture of designated property under 18 U.S.C. § 982.
Defendant moved to dismiss certain counts of the original indictment and to sever another. The government responded to defendant's motion by obtaining from the grand jury a superseding indictment. The government says the superseding indictment cured any arguable defects in the original charging instrument. Defendant says the superseding indictment is as flawed and deficient as its predecessor. These predictable appraisals extended the briefing process. Defendants have filed three briefs and the government two.
A. The Superseding Indictment
The indictment alleges that at the relevant times, defendant Harris was the president, chief executive officer, and record owner of 60% of the stock of Arochem International, Inc. ("International") and Arochem Corporation ("Arochem"), collectively referred to as the "Arochem Companies." The Arochem Companies were incorporated in 1988.
International operated a petroleum and petrochemical refinery complex in Puerto Rico. Arochem, which maintained its principal offices in Connecticut, traded in petroleum and petroleum products and provided management services to International, including supervising the inventory and trading activities of International and marketing petrochemicals and petroleum products.
The indictment further alleges that defendant was the sole shareholder and managing director of Arochem International, Ltd. ("Limited"), based in the Cayman Islands, which engaged in trading and financing of crude oil and petroleum products.
In or about January of 1990, a consortium of banks led by Chase Manhattan Bank, N.A. entered into a revolving credit agreement with the Arochem Companies, which permitted the Companies to borrow up to $ 245 million as needed for their business operations. The loans were secured by the Companies' inventory of petroleum and petroleum products and by their receivables and cash.
The initial credit agreement expired in January 1991. The Arochem Companies and the Chase group of banks extended the agreement on six separate occasions through November 30, 1991. During the lifetime of the agreements and the extensions, the Arochem Companies agreed to maintain minimum levels of tangible net worth, net income, working capital, and inventory, and to limit the net trading positions that the Companies could hold. These agreements, the government alleges, were intended to protect the lending banks by permitting them to call outstanding loans and discontinue ongoing lending facilities if the financial stability of the Arochem Companies became threatened. The limit on trading positions was designed to prevent the Arochem Companies from engaging in excessive speculative trading.
The loan agreement required the Arochem Companies to provide periodic reports, known as "borrowing base reports," to the lending banks. The borrowing base reports set forth the Companies' assets, liabilities and trading positions, including the crude oil inventory and "forward purchases of inventory" that the Arochem Companies had purchased for refining at International's refinery in Puerto Rico. A "forward purchase of inventory" reflects a contract for future delivery of petroleum or related products. The indictment alleges that the banks required the information contained in the borrowing base reports, together with other unspecified financial statements and verbal and written submissions, "in order to determine whether the Agreement's covenants were being met, and, accordingly to decide whether to call outstanding loans, whether to discontinue ongoing lending facilities, and whether to extend the Agreement each time it expired." Superseding Indictment at P 4.
Between January 1990 and December 9, 1991, the Arochem Companies submitted borrowing base reports to the lending banks which represented that the eligible collateral securing the loans exceeded $ 200 million. As of November 30, 1991 "based on these financial statements and borrowing base reports," the Companies had borrowed about $ 200 million from the banks. In fact, the collateral held by the Arochem Companies as of November 30, 1991 was less than $ 35 million. In February 1992, the group of lending banks filed an involuntary bankruptcy petition against the Arochem Companies in the United States Bankruptcy Court for the District of Connecticut. The government alleges that the Chase group of banks has lost in excess of $ 150 million on its loans to the Arochem Companies. Id. at Id. at P 5-6.
Against this factual background, the superseding indictment alleges the following fraudulent scheme. Harris and other unnamed officers and employees at the Arochem Companies are charged with having fraudulently induced the Chase group of banks "to lend and continue lending more than $ 200 million to the Arochem Companies." Id. at Id. at P 7. The following specific conduct is alleged:
Defendant and his co-conspirators concealed the true financial condition of the Arochem Companies from the lending banks and the Companies' independent auditors by submitting information to the banks which fraudulently overstated the Companies' assets and understated its liabilities.
As a further part of that scheme, defendant misappropriated monies belonging to the Arochem Companies for his own personal benefit.
Defendant and his co-conspirators concealed from the banks excessively speculative trading practices prohibited by the loan agreement.
This conduct is alleged in P 7 of the superseding indictment, which concludes with the allegation that the false and fraudulent information provided by the Arochem Companies "was designed to and did in fact induce the Chase group of banks to lend and continue lending to the Arochem Companies."
PP 8-10 of the superseding indictment allege the following conduct:
Defendant and other officers and employees of the Arochem Companies fraudulently understated the Companies' liabilities and overstated their inventories, net income and other assets "by creating and causing the creation of false and fictitious contracts, invoices, receipts, wire transfers and other documentation." In particular, in April 1990 defendant created false and fraudulent documentation, including invoices and warehouse receipts, purporting to show that International had entered into contracts for the delivery of approximately $ 60 million worth of Tapis crude oil which it held in Malaysia. Thereafter, between April 29, 1990 and November 4, 1990, defendant caused to be submitted to the lending banks a series of borrowing base reports that fraudulently represented that the Arochem Companies possessed this inventory, whereas in fact they did not. P 9.
As a further particular instance of fraudulent conduct, the government alleges that defendant and others created "at least three additional sham contracts that falsely and fraudulently stated that International owned approximately $ 48 million of petroleum condensate," an inventory item which defendant included in borrowing base reports issued to the banks between May 1991 through December 9, 1991, whereas the Arochem Companies did not own and hold such inventory. P 10.
P 12 of the superseding indictment charges defendant with the "fraudulent diversion of funds." In particular, the superseding indictment alleges that "on four occasions between June and October 1991, at a time when Limited owed money to the Arochem Companies, Harris transferred a total of approximately $ 3.7 million from Limited's accounts in Switzerland to defendant's personal account at the Bank of New York, an amount which far exceeded Limited's net equity." This conduct, the government alleges, reflects a conspiracy to violate the wire fraud statute, 18 U.S.C. § 1343, and the bank fraud statute, 18 U.S.C. § 1344. It was a scheme, P 14 alleges, "to defraud the minority shareholders of the Arochem Companies" and the lending banks "which collectively had lent more than $ 200 million to the Arochem Companies."
Counts Two through Eight allege substantive violations of the bank fraud act. After incorporating by reference the allegations of Court One, the bank fraud counts are introduced by P 17, which alleges that on the dates set forth with respect to each count, defendant "executed and attempted to execute a scheme and artifice to defraud" the lending banks "by falsely representing the assets, liabilities and trading positions of the Arochem Companies to the New York offices of these financial institutions, directly and indirectly." Count Two refers to the "original agreement," and Counts Three through Eight to each of the six extensions. The time period alleged with respect to each count apparently reflects the period covered by the original agreement or the particular extension.
Count Nine charges defendant with violation of the money laundering statute, 18 U.S.C. § 1956(a)(2). The government alleges that defendant transferred approximately $ 7.5 million from the Arochem Companies' accounts at Chase Manhattan Bank in New York through the Union Trust Company in Connecticut and into Swiss bank accounts owned by Limited, knowing that these funds were the proceeds of frauds on financial institutions. P 19. By transferring those funds, the government alleges, defendant "concealed from the Chase group of banks the extent to which he was utilizing Limited to finance cargoes in transit and trading activities."
Counts Ten through Twenty-One allege violations of the wire fraud statute, 18 U.S.C. § 1343. Specifically, the government refers to defendant's transfer of funds of the Arochem Companies in New York to the Swiss bank accounts owned by Limited. The government alleges that these transfers were for the purpose of executing defendant's scheme to defraud the lending banks. It is alleged at P 21: "The monies held by the Arochem Companies at Chase Manhattan Bank were the proceeds of the working capital revolving credit facility extended by the Chase group of banks, and as such, were monies due to be repaid to the Chase group of banks at the conclusion (or default) of the loans." Counts Ten through Twenty-One each refer to a single transfer of money, the first occurring on April 12, 1991 and the last on September 19, 1991.
Count Twenty-Two charges defendant with conducting a continuing financial crimes enterprise, in violation of 18 U.S.C. § 225.
Count Twenty-Three alleges that in November 1989 defendant knowingly made a false statement for the purpose of influencing the Bank of New York to extend a loan to him, in violation of 18 U.S.C. § 1014.
In Count Twenty-Four the government prays for forfeiture of certain specified property of defendant, in accordance with 18 U.S.C. §§ 982(a)(1) and 982(b)(2).
B. The Defendant's Motions
As to the money laundering count, Count Nine, and the wire fraud counts, Counts Ten through Twenty-One (which form the predicates for the money laundering count), defendant contends they should be dismissed because the indictment fails to allege a scheme to defraud the victim of its money or property.
With respect to Count Twenty-Two, the continuing financial crimes enterprise count, defendant contends that the statute is constitutionally void for vagueness.
Lastly, defendant moves to sever Count Twenty-Three from the trial of the other counts.
1. Sufficiency of Allegations
Counts Two through Eight charge violations of 18 U.S.C. § 1344, which provides:
Whoever knowingly executes, or attempts to execute, a scheme or artifice--
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $ 1,000,000 or imprisoned not more than 30 years, or both.
To charge an offense under the statute, the government must allege conduct by defendant "designed to deceive a. financial institution into releasing property, with the intent to victimize the institution by exposing it to actual or potential loss." The indictment is sufficient if it "alleges a scheme that was intended to victimize a bank." This requires a "nexus" between the defendant's conduct and the victim bank. "Common sense" must inform the reading of the indictment; and the bank fraud statute itself, enacted to protect banks' financial integrity, "should be read expansively." United States v. Stavroulakis, 952 F.2d 686, 694-95 (2d Cir.), cert. denied, 118 L. Ed. 2d 580, 112 S. Ct. 1982 (1992).
Notwithstanding that expansive reading, the bank fraud statute does not apply to "situations where money is merely withdrawn legally from a federally insured bank by a victim and where the bank itself is in no way victimized." United States v. Blackmon, 839 F.2d 900, 904 (2d Cir. 1988). But "the bank need not actually be victimized"; attempting to execute a fraudulent scheme "with the intent to victimize the bank" falls within the statute. Stavroulakis at 694. And a bank is "victimized" within the ambit of the statute even if the scheme targets an accountholder's money, so long as the fraudulent conduct is directed at the bank with the intent ...