People v. Smith

WORK, J., Concurring and Dissenting.

— We concur in the results reached in sections I and III of the lead opinion for the reasons generally expressed by our colleague but cannot accept the rationale or result found in section II, that portion discussing Smith’s theft conviction. For the following reasons, we find substantial evidence supports that verdict and affirm the theft conviction.

Embezzlement, as the jury was instructed, is defined in Penal Code section 506 essentially as follows: Every person entrusted with or having in his control property for the use of another person, who fraudulently appropriates it to any use or purpose not in the due and lawful execution of his trust is guilty of embezzlement. 1

Smith argues on appeal, the July 17, 1973, transaction between himself and Sovereign was a sale and payment of the $8.9 million to Smith was the sales price, and his conviction must be overturned because, even though Sovereign may not have received the property it purchased, the theft (if any) was by false pretenses, not embezzlement.

The prosecution relied solely on an embezzlement theory and argued the evidence proved beyond a reasonable doubt that no sale was intended and Smith directed the disbursement of the $8.9 million to himself with the specific intent to defraud Sovereign, and steal the money. However, the prosecution gave the jurors an alternative: should they find the July 17, 1973, transaction to be a sale, then Smith, in control of Sovereign assets, *1189 would be Sovereign’s fiduciary as to the Padre debts evidenced by the surplus certificates and unsecured advances. Thus, when he received partial payment on those debts in February 1974, Smith would have embezzled those funds by breaching that fiduciary relationship and using them as his own. The jury was instructed it could find Smith guilty of either the 1973 or the 1974 theft, but not both.

The jury resolved these alternatives by finding “no sale,” and convicted Smith for the July 1973 embezzlement. The lead opinion concedes it was a sham sale. Substantial evidence supports that conclusion and the conviction.

Smith’s state of mind at the time he ordered Sovereign to give him $8.9 million was a fact question for the jury. It found his intent was to steal, not sell, and unless the record read as a whole lacks substantial evidence to allow a reasonable person to so find beyond a reasonable doubt, it is conclusive on appeal. (People v. Green (1980) 27 Cal.3d 1, 55 [ 164 Cal.Rptr. 1 , 609 P.2d 468 ]; People v. Norris (1950) 99 Cal.App.2d 658, 661-662 [ 222 P.2d 283 ].)

It is conceded by the defense, and corroborated by overwhelming evidence, that Smith totally controlled, directed and managed all Sovereign activities directly, or through figureheads, mainly Phillip Toft. Neither Smith nor Toft was a director, shareholder, officer or employee of Sovereign, thus further obscuring their role as far as the public record would appear.

In reviewing the relevant evidence supporting the jury finding that Smith never intended to sell his Padre receivables to Sovereign, we look to the relevant history of similar Smith transactions presented by the evidence, and to evidence of the “Smith connection” with each business entity involved.

The myriad of Smith-owned and controlled entities were structured in a tier system, with several corporations nominally controlling numerous subsidiary entities, and others primarily holding assets. From at least 1963 through May 1973 (when Smith and each entity entwined in his labyrinthine business empire were prohibited from further dealings in USNB stock), the expansion and maintenance of Smith’s business domain required massive infusions of borrowed monies.

Because Smith was the controlling shareholder in USNB, and also controlled its lending activities, he was prohibited from personally borrowing from the bank. However, as the holder of a substantial amount of USNB stock and in control of substantial blocks of shares held by his family and *1190 other entities, Smith was able to borrow millions of dollars from third party lending institutions, pledging these shares as collateral. At the same time he also borrowed monies from corporations he secretly controlled, after they had borrowed the monies from third parties. These included funds borrowed directly from USNB or from third party lenders leveraged by USNB letters of credit guaranteeing repayment. Smith’s loans were duly listed on the books of the lending entity, bore interest and, from time to time, were repaid. Thus, to the casual auditor, these were arm’s-length transactions between Smith and facially independent lenders.

Structuring his business entities in this tier system gave Smith certain advantages. First, he could hide his identity as the person actually controlling subsidiary entities by listing his agents and employees as directors and officers. In this manner Smith passed borrowed funds through supposedly independent corporations into Sovereign and other Smith-controlled entities, which then were distributed to him personally in the form of loans. These flow-through monies were obtained in large part by borrowing from USNB, which Smith and his family could not do directly. Further, because of banking regulations, USNB could not loan any single entity more than 10 percent of USNB’s unimpaired capital. (A corporation and all its subsidiaries are treated as a single entity for this purpose.) However, Smith maneuvered USNB loans directly to individual subsidiary corporations without disclosing its parent, so that each subsidiary was able to obtain loans up to that single limit. (Thus, theoretically, a corporation having 20 subsidiaries could obtain funds totaling 200 percent of USNB’s legal lending limit.) Smith, directly managing USNB, thus skirted banking regulations. To avoid detection he ordered funds be transferred between subsidiary, parent corporation, himself and lenders in a manner to disguise the fact it was the same money being moved.

According to Sovereign’s comptroller (Schroeder), Smith and Toft made all decisions for Sovereign. In 1971, Sovereign listed 15 to 20 subsidiary companies. By 1973, it had divested itself of all but one and was primarily an asset-holding corporation through which millions of dollars borrowed by other Smith-controlled subsidiaries were funneled for distribution.

In context of the background stated above, we address the specifics of the embezzlement scheme: By 1965 Smith needed cash, but his personal ability to borrow—through arm’s-length transactions—was essentially foreclosed because all USNB stock he controlled was pledged to secure outstanding loans. He devised a simple embezzlement scenario which proved so successful he employed it at least three times thereafter, including the July 1973 theft of which he stands convicted: Smith ordered the comptrollers of corporations he owned to disburse millions of dollars to him under the guise *1191 of fictitious sales. These disbursements were listed on the books of the disbursing corporation as the purchase price for blocks of USNB stock (usually at a value considerably in excess of its actual worth). However, the shares supposedly “purchased” were never transferred to the disbursing corporation, and were either totally pledged to third parties as security for Smith’s loans which were still outstanding, or consisted of shares which Smith did not own. (One transaction involved a supposed “purchase” of shares the “purchaser” already owned.) Thus:

In December 1965, Smith obtained $1.85 million from one of his secretly controlled corporations, United States Holding Company of California. 2 US Holding recorded the transaction as a purchase of 50,000 USNB shares. No shares were delivered and Smith continued to treat them as his own, pledging them to secure additional personal debts once the obligations, for which they were secured at the time he obtained the money from US Holding, were paid. (In fact he transferred ownership of 8,500 of these shares to other entities in 1971.) Smith used the US Holding money to repay his outstanding loan to it, including a $104,000 interest payment for which he took a tax deduction, reducing his tax liability. This transaction was not reported to the comptroller of currency as would have been necessary had there been an actual sale of USNB shares.

In March 1971, Smith engaged in a similar scam by obtaining $2.3 million through a corporation known as Missouri Western which he secretly controlled. 3 (On March 3, 1971, Smith had written a letter to a firm of attorneys certifying neither he nor his family had any “ownership interest or control, directly or indirectly” in Missouri Western. However, one month later Smith told a Chemical Bank representative that Missouri Western was one of his companies and he wished to borrow $2 million in Missouri Western’s name rather than his own, which he would collateralize personally with USNB stock.)

In any event, in March 1971, Smith facially agreed (with himself) to sell 79,000 shares of USNB stock to Missouri Western in exchange for the $2.3 million. Although he received the $2.3 million, which was funneled through *1192 Missouri Western from Sovereign (Sovereign listed the transaction on its books), no shares were ever transferred. Again, 13,000 of these shares were not even owned by Smith and most or all were pledged to secure other Smith loans or those of entities controlled by him. Smith used the money to repay a personal loan and interest, this time to Sovereign, again taking a tax deduction on the interest paid.

In June 1971, Sovereign (at Smith’s direction) disbursed $5.3 million to Smith and recorded the disbursement as the purchase price for 161,000 shares of his USNB stock having a market value of $25 to $26 per share. (The purported “sale” price to Sovereign was an inflated $33 per share, a price Smith arbitrarily set and ordered Sovereign to disburse in order to obtain enough cash to satisfy his immediate need.) Smith used $2.59 million to reduce his outstanding loan obligation to Sovereign and pay interest for which he took a tax deduction. Again the transaction was not reported to the comptroller of currency, no shares were transferred and Smith continued to deal with them .as his own. (For instance, 24,000 shares were already pledged to Crocker Bank and, when that loan was paid in December 1971, Smith used them to collateralize his personal loan with the Bank of California. In 1973 when the Bank of California was paid, Smith pledged them to the Franklin National Bank for another personal loan.)

In July 1973, Smith needed another tax deduction and owed Sovereign $9 million on various loans, but now the May 1973 cease and desist order precluded him from dealing with USNB stock. Having had remarkable success with the sham-sale ploy (more than $9 million of unreported income to date) Smith retained the same script but turned to the Padres, his only other large unencumbered asset to “sell.”

Smith was the sole beneficial owner of the San Diego Padres Baseball Team and had advanced millions of dollars to the franchise. Some loans were evidenced by six documents entitled “surplus certificates” and others were unsecured shareholder advances. Those debts evidenced by the surplus certificates could only be paid from the net equity of the Padres after liquidating all other secured and unsecured debts. Although subordinate to all other creditors, the surplus certificates had priority over all shareholder equity. From at least 1969 through 1972 the Padres had a very questionable net worth and, according to their terms, no debts evidenced by the surplus certificates legally could have been paid.

The total advances covered by six certificates was approximately $7.9 million. Smith, although a director of the Padres, was not its officer or employee, however, his total control is reflected in the corporate resolutions and minutes of November 13, 1972, when Smith told the Padres’ directors *1193 that he had previously obtained repayment of $3,775,000 to retire some of the surplus certificates. Although these payments violated the Padres’ promise to subordinate its obligations to Smith to those it owed to all other creditors, the directors “ratified” this already accomplished act. 4

As of July 1973 the Padres owed Smith $4.12 million “secured” by the surplus certificates and another $4.75 million in shareholder advances. Smith’s chances of obtaining payment from the Padres of more than one-half of this debt was nil because he had agreed to sell the Padres for a total of $12 million subject to priority claims of $3,204,417 to Chemical Bank, $345,000 on the baseball sale accounts and $3.75 million of other obligations which had to be assumed by the buyer. Thus, Smith knew at best a future Padre sale could only generate slightly over $4 million to himself. As chairman of the board of directors, vice president, treasurer and assistant secretary of the Padres, Toft also knew this fact.

Undeterred, consistent with his course of dealings though the years, Smith ordered Toft to have Sovereign issue Smith a check for an amount equal to the total Padres’ indebtedness to him, plus interest. At Toft’s direction, Schroeder issued a check to Smith for $8.9 million. Neither Smith nor Toft discussed the transaction with Schroeder 5 or any director, officer, shareholder or representative of Sovereign. Although Smith’s memorandum to Toft dated July 9, 1973, stated: “We can then write to the Padre organization and tell them I have sold these notes to Sovereign State Capital and endorse them over so they can change the records accordingly,” this was never done. Smith never transferred the surplus certificates or his interest in the Padre advances to Sovereign.

Therefore, on July 17, 1973, Sovereign started the day with assets of more than $18 million; at least $8.9 million cash, and receivables from Smith in excess of $9 million. When it gave $8.9 million to Smith it reduced its cash by that amount but still held $9 million in his accounts receivable. Later that same day, Smith gave Sovereign his personal checks for $8.9 million, reducing Sovereign’s accounts receivable from him accordingly. Thus, by the end of the day Sovereign was in the same cash position as when the day began, but now held only Smith’s alleged promise to deliver paper receivables from the Padres. Smith obtained a sizeable tax deduction *1194 because of the interest payment to Sovereign which he used to offset a substantial tax liability, and he reduced his real indebtedness by $8.9 million without showing any income or having to borrow.

That Smith never intended to sell or transfer his interest in the surplus certificates or other indebtednesses owed him by the Padres is evident. On June 22, 1973, he wrote City Bank stating he would receive $9 million from the sale of the Padres which he would use to satisfy his personal indebtedness to that bank. On July 3, 1973, one of Smith’s representatives (Woltman) wrote First National Bank of New Jersey to the same effect, except accurately stating Smith would get only $4 to 5 million. On August 21, 1973, a month after taking Sovereign’s $8.9 million, Smith told the Bank of Wichita he was selling the Padres and would use the proceeds to satisfy his obligation to that bank. On August 20, 1973, Smith made the same promise to the Valley National Bank and on December 8, 1973, he told Massachusetts Mutual he would use these funds to pay his account with it. Further, on February 9, 1974, Smith signed an agreement with the Internal Revenue Service, the Padres and others certifying he still owned the Padre obligations “secured” by the surplus certificates as well as those incurred through shareholder advances. Based upon this certification, Smith was credited with the monies received from the sale of the Padres, and they were used to satisfy his personal obligations.

In sum, substantial evidence shows Smith never intended to sell his interest in the surplus certificates or other Padres’ receivables he held. The letters both immediately before and after July 17, 1973, state his clear intent to retain them and to use the monies received for his personal obligations, and he ultimately did just that. Further, the jury was entitled to consider the two 1971 transactions and the 1965 transaction, where he obtained money through similar sham sales without exchanging anything for the monies received, as competent evidence of his common scheme and intent. (Evid. Code, § 1101, subd. (b).) It is apparent he did not intend to sell the Padres receivables to Sovereign. No person testified Smith intended to sell the Padre obligations to Sovereign or that Sovereign intended to buy them. On appeal, as at trial, Smith points only to entries in Sovereign’s accounting books stating a sale occurred or was intended. On these facts, we are understating when we hold the jury could reasonably find beyond reasonable doubt these entries did not reflect the truth.

The Trial Court Correctly Instructed the Jury on Elements of Embezzlement

Smith meritlessly argues the trial court failed to tell the jury “there is a difference between a mere violation of a trust and the fraudulent appropri *1195 ation which constitutes embezzlement.” The court instructed: “The theft which is known as embezzlement consists of the fraudulent appropriation of money or other property by a person to whom it has been entrusted.

“The law says that every trustee or agent or other person who may be entrusted with the property of another, or such person who may have in his control property of another, who fraudulently appropriates it to any use or purpose not in the due and lawful execution of his trust is guilty of theft by embezzlement.

“Theft known as embezzlement consists of the fraudulent appropriation of money or other property by a person to whom it has been entrusted.

“The law prescribes that every trustee or agent or other person entrusted with the property of another, or having in his control the property of another, who fraudulently appropriates it to any use or purpose not in the due and lawful execution of the trust is guilty of theft by embezzlement. [The foregoing points were stated twice because the court wanted to be sure the jurors had sufficient opportunity to take notes.]

“The essential elements of embezzlement are:

“The fiduciary relation—Well, fiduciary relation arising where one person entrusts his property to another—and, parenthetically, now, you remember, I said ‘person’ and ‘corporation,’ I was going to use as meaning the same thing—and the fraudulent appropriation of the property by the latter. Those are the essential elements.

“In this instance, we define fraud as any act that involves a breach of duty or breach of trust or breach of confidence, and which is injurious to another.

“Such a breach of trust and injury to another person occurs in a case in which an officer of a corporation, or an agent of a corporation who is entrusted with the money and property of that corporation uses the money or property knowingly and intentionally for his own purposes, in violation of that trust.

“Any such fraudulent appropriation of funds or property held in trust constitutes embezzlement, whether there is a direct personal benefit or not, as long as the owner is wrongfully deprived of his money or property.

*1196 “To constitute embezzlement, it is not necessary to show actual physical possession of the money or the property. It is sufficient to show that while the defendant was not in actual possession of the money, it was under his control in the sense that it was under his direction and management.

“One of the essential elements of embezzlement that I spoke to you about two or three minutes ago is fraudulent intent.

“Evidence of secrecy or concealment may be considered evidence of fraudulent intent. Lack of secrecy or concealment may be considered to tending to negate any fraudulent intent. However, there may be embezzlement where the appropriation is openly made and, consequently, without concealment. ” (Italics added.)

Earlier the court had advised the jurors: “in count five, for instance, the charge is that on or about July 17, 1973, C. Arnholt Smith did unlawfully take and steal personal property of Sovereign State Capital . . . .” This hammers home that the gist of the charge is stealing Sovereign’s property, requiring an appropriation, not just an injury in a civil sense.

When the embezzlement instructions were read to the jurors, they were specifically related to the theft charges. The court dealt separately with the tax counts and identified those instructions relating to those counts. The court later again separately instructed the jurors regarding the theft charges as follows: “Count five charges a theft from Sovereign State Capital in 1973; . . .

“So, count five charges the 1973 theft from Sovereign State Capital . . . .” (Italics added.)

While instructing the jury solely in relation to the theft charges, the court discussed specific intent. After giving the general CALJIC preamble, the court stated, “In the crime of theft by embezzlement, the necessary specific intent that we have talked about is the intent fraudulently to appropriate property of another in violation of the trust.” Thus, the trial court scrupulously avoided any instructional overlapping between the type of trustee breach of trust which might result in some noncriminal obligation to the beneficiary, and that which subjects a fiduciary to criminal sanctions. The trial court repeatedly stated there had to be a theft of property and that Smith was charged with stealing Sovereign’s money. The term fraudulent appropriation was used in that context. The jurors could not have been misled as happened in the case Smith cites, People v. Whitney (1953) 121 Cal.App.2d *1197 515, 521 [ 263 P.2d 449 ], where this court found error in instructions which implied that any conversion of trust property would establish a criminal embezzlement, language carefully avoided by the trial court here.

The Evidence Does Not Support a Jury Instruction That Smith’s Good Faith When Personally Dealing With His Controlled Corporations Was a Defense to Theft

Smith argues the trial court was obligated to instruct the jury it could not find him guilty of embezzlement if he acted in good faith. He did not request such an instruction relating to the theft counts and, insofar as the tax convictions are predicated on income be generated through theft, the jury was instructed that his good faith belief he had paid all the income taxes owed would be a defense to tax fraud.

On the theft counts, the trial court had no sua sponte duty to instruct on defenses not raised by the defense or supported by substantial evidence. (People v. Sedeno (1974) 10 Cal.3d 703, 716 [ 112 Cal.Rptr. 1 , 518 P.2d 913 ].) Smith did not defend the 1973 Sovereign embezzlement charge on the ground he acted in good faith. Unlike the defendant in People v. Stewart (1976) 16 Cal.3d 133 [ 127 Cal.Rptr. 117 , 544 P.2d 1317 ], no one testified to any fact which would imply Smith acted in good faith if the transaction was found not to be a sale. His sole defense was that it was a sale.

Further, there is no substantial evidence in the record to support a defense of good faith. We reject Smith’s claim that evidence he had the ability to control, manage and direct the flow of assets into and from Sovereign implies that when he openly withdrew funds he acted in good faith. In spite of his efforts to equate his conduct with the acts committed by the defendant charged with embezzlement in People v. Stewart, supra, he cannot do so. In Stewart , the Supreme Court held that one who testified he withdrew his employer’s funds for his personal use from time to time because he had been told by his employer he was permitted to do so, and made no attempt to conceal these withdrawals and that they were for his personal use, put the trial court on notice of facts sufficient to trigger its duty to instruct on the good faith defense, even in the absence of a request. Here, no evidence suggests Smith ever believed he had permission to withdraw Sovereign assets for his personal use, nor does he claim such authority. He, in fact, denies he did so. To the contrary, he carefully orchestrated each disbursement to insure that a cursory auditor would believe the transactions were legitimate sales. Unlike Mr. Stewart, C. Arnholt Smith took great pains to make the transaction appear to be a sale rather than a withdrawal for personal use. He was not entitled to an instruction on the defense of good faith.

*1198 We affirm the conviction for theft as charged in count five concurring with the lead opinion as to the manner of treatment of the tax fraud convictions. 6

Cologne, Acting P. J., concurred.

A petition for a rehearing was denied June 12, 1984, and appellant’s petition for a hearing by the Supreme Court was denied August 15, 1984.

To constitute embezzlement, one need not have physical possession or custody of another’s property; the right to manage or direct the disposition of those assets is all that is required. {People v. Knott (1940) 15 Cal.2d 628, 631 [ 104 P.2d 33 , 128 A.L.R. 1367 ],

United States Holding Company of California later changed its name to Sovereign State’s Capital. This is a separate entity from United States Holding Company of Delaware of which Smith and his family were record owners.

The listed “owner” of Missouri Western was one M. J. Coen who later admitted he had no idea he was listed as an owner on that date nor that the corporation was supposedly purchasing any shares of USNB stock from Smith. When the Security Exchange Commission subpoenaed Coen later during an investigation of Smith’s suspicious USNB stock dealings, Coen wrote to Smith asking he advise him on such basic questions as “who is running the company, where are the books, etc.” He concluded this SOS letter with “destroy.” “Personal and Confidential. Destroy when it has served its purposes.” (Ex. 37-23.)

This is not surprising in that all directors and officers of the Padres were Smith’s family and employees. For instance, Toft, Smith’s figurehead in various enterprises, was chairman of the Padres’ board of directors, vice president, treasurer and assistant secretary. In an apparent freudian slip, the November 13, 1972, minutes signed by Toft as chairman, refer to “Chairman Smith.”

Schroeder was not only Sovereign’s comptroller at this time, but a vice president and director as well.

Smith claims the probation order must be set aside on several grounds: first, because it was improper to impose three consecutive one-year jail terms as conditions of felony probation. We do not address this contention because our disposition of the tax fraud convictions eliminates, for the present at least, the issue of whether consecutive terms in jail may be imposed for any reason other than as a “sentence” for misdemeanor convictions. If the People allow the tax fraud counts to remain misdemeanors, resentencing will be required and the trial court will be free to deny probation on those counts, or to grant probation on other terms. In the event the People retry those counts, the issue is moot. For the same reasons, we need not address his claim there was any need for the trial court to state reasons for imposing probation jail terms.

Second, Smith claims the entire probation order is void because the trial court failed to orally state its reasons for granting probation. (Cal. Rules of Court, rule 405(f), Pen. Code, § 1170, subd. (c).) Assuming there is such a duty, Smith shows no prejudice. He argued for probation. The alternative is denial of probation and a prison sentence.

Third, Smith claims the trial court abused its discretion because a jail term was not reasonably related to the crimes he committed. Facially, it is absurd to contend a one-year jail term is an unreasonable condition to impose for stealing $8.9 million, or for that matter, for each of the tax frauds. However, Smith states these terms, imposed five years ago, amounted to a “death” sentence because he was then eighty years of age and in poor health. These factors and others cited by defendant were considered by the trial court and no abuse of discretion is shown on this record. Smith is free to submit current life-threatening medical factors to the trial court by way of a motion to modify probation, if appropriate.

Finally, we note the trial court’s general condition of probation requiring Smith to pay a $681,000 reparation on account of the liability to the State of California for taxes he failed to pay in 1971, is not a proper condition to be attached to the probation granted on the theft conviction. At this time it is unnecessary to decide whether it is a reasonable condition to be imposed on the tax fraud counts.