Petition — Mann v. United States
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the United States
Ocroser Term, 1975
No. 75-619 {
Ropert A. Mann anv Bank or THe Soutruwest,
NATIONAL ASSOCIATION,
Petitioners
Unitep States or AMERICA,
Respondent
—
ee
i PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
——-
SzacaL V. WHEATLEY
Cart Rosin Teacue
(On The Brief)
Oppenheimer, Rosenberg,
Kelleher & Wheatley, Inc.
Suite 620, 711 Navarro
San Antonio, Texas 78205
Wis R. Ecxsarpr
Vinson, Elkins, Searls,
Connally & Smith
First City National
Bank Building
Houston, Texas 77002
Hazotp R. DeMoss, Jr.
Bracewell & Pattergon
First City National
Bank Building
Houston, Texas 77002
Attorneys for Petitioner,
Robert A. Mann
Cuester F'uiron
Fulbright & Jaworski
Bank of the Southwest
Building
Houston, Texas 77002
Morton L. Susman
2290 Two Shell Plaza
Houston, Texas 77002
Attorneys for Petitioner,
Bank of the Southwest,
National Association
———————
Bowne of Houston, Inc.
a
Printed in U.8.A.
INDEX
OPINIONS OF THE COURTS BELOW... 2
JURISDICTION OF THE SUPREME COURT... 2
QUESTIONS PRESENTED FOR REVIEW __.. 2
| CONSTITUTIONAL PROVISIONS, STATUTES
and REGULATIONS INVOLVED... 4
STATEMENT OF THECASE............... 4
A. COURSE OF THE PROCEEDINGS... 4
B. BACKGROUND OF PROCEEDINGS ____. 9
REASONS RELIED ON FOR THE ALLOWANCE
OF THE WRIT........................... 15
I. The decision of the Court of Appeals con-
flicts with the applicable principles estab-
lished by this Court in that the Court of
Appeals erred in failing to affirm the holding
of the trial court that:
A. The indictment, as clarified by the Bill of
Particulars, failed to state the offense of
conspiracy under 18 U.S.C. § 371 to will-
fully misapply funds of a national bank .
as prohibited by 18 U.S.C. §656......... 15
B. This prosecution deprives Petitioners of
due process of law because the Petitioners
did not have prior notice that the acts
charged were criminal acts ..___.. 18
II. The Court of Appeals decided an anentend
question of law which has not been, but should
be, settled by this Court because this case
involves the nation’s entire national banking
industry and is a case of first impression in
this court. The indictment presents allega-
tions of fact not heretofore believed by the
banking industry to constitute a crime, nor
| expressly prohibited by any statute or regu-
lation, and involving a practice which the
Department of Justice concedes to be common
and widespread. In addition, the transaction
for which Petitioners have been indicted as
constituting a willful misapplication of bank
i
funds within the meaning of 18 U.S.C. § 656
has been treated inconsistently by the Comp-
troller of the Currency and the Department of
Justice, causing widespread confusion in the
banking industry, and is of a type which is
still being sanctioned ads the Federal Reserve
Board .
III. The Court of ime in its hibit: oy 80
far departed from the accepted and usual
course of judicial proceedings as to call for
this Court’s power of supervision. The Court
of Appeals held that at a Rule 12 hearing on
Motion to Dismiss, the defenses of lack of
fair notice to the Petitioners and of violation
of Petitioners’ constitutional rights of due
process were not capable of determination
based on undisputed evidence without trial of
ED io ous bp h a ge PSs we veh
os oes se a auleen eee tel es
APPENDIX
A. Opinion and J udgment of the Court of Appeals
B. Memorandum and Order of The District Court
C. Constitutional Provisions, Statutes and Regu-
lations Involved |
D. Orders Issued by the Board of heninee of the
Federal Reserve System
26
28
A-1
B-1
C-1
. D-l
TABLE OF AUTHORITIES
Cases
Anderson National Bank v. Luckett, 321 U.S. 233,
- 64 §.Ct. 599, 88 L.Ed. 692 (1944) ................ 17
Bouie v. Columbia, 378 U.S. 347, 84 S.Ct. 1697, 12
Ss cece Sem es alk oye ea e's « 19
Coffin v. United States, 156 U.S. 432, 15 S.Ct. 394, 40
= & (| — 5SR REG err a at oot “kala 22
Raley v. Ohio, 360 U.S. 423, 79 S.Ct. 1257, 3 L.Ed.2d
ey EE sk ee ab ace 19-22
United States v. Britton, 107 U.S. 655, 2 S.Ct. 512,
27 L.Ed. 520 (1883) ......... -.eeeee. 26-18
United States v. Britton, 108 US. 193, 2 S.Ct. 526,
27 L.Ed. 701 (1883) .__. é Pee cyt eee
United States v. Covington, 395 US. 57, 89 S.Ct.
1559, 23 L.Ed.2d 94 (1969) .. .. ss, 27
United States v. DePugh, 266 F Supp. 417 (W.D.
ARR a. | Ss Pea ee a res soe 5
United States v. Guaranty Trust Co. of new York,
PA Re OR, 17
United States v. Haskins, 345 F.2d 111 (5th Cir.
OS Oe re Se an dau ateals 9 de eed one 5
United States v. Heinz, 218 U.S. 532, 31 S.Ct. 98, 54
L.Ed. 1139 (1910) ....... 15-17
United States v. Insco, 496 F. od 204
(5th Cir. 1974) . tt 19, 22-23
United States v. nN 385 US. 475, 87 S.Ct. 574,
17 L.Ed.2d 526 (1967). ....._. 19-22, 26, 28
United States v. Murray, 297 F.2d 812 (2d Cir.
1962), cert. denied 369 U.S. 828, 7 L.Ed.2d 794... 5
United States v. Northway, 120 U.S. 327, 7 S.Ct. 580,
30 L.Ed. 664 (1887)... 15-17
United States v. Pennsylvania Industrial Chemical
Corp., 411 U.S. 655, 93 S.Ct. 1804, 36 L.Ed.2d 567
(1973) v 27
United States v. on. 399 U. S, 267, 90 ‘s. Ct. 2117,
26 1..Ed.2d 608 (1970) 27
United States v. Strauss, 283 F.2d 155 _ Cir.
SN asc Gis nah areal a 2 | 18
ii
Statutes
e i eee See eee eee
12 U.S.C. §37la . oe eeKde nbd ee ete 17
12 U.S.C. § 1972 40.0005 Choe e ee
18 U.S.C. § 371 | ere heer 2, 4, 8,15
18 U.S.C. § 656 | | | | ........Passim
8!) £5 eer 4
OD WG Bie oon atone. caweuves dea ede i]
28 U.S.C. §1254(1) ........... ...... Jan ae
Procedural Rules
Rule 12, Federal Rules of Criminal Procedure _ 8, 26, 27
Rule 22(2), Rules of the Supreme Court of the United
States poe, y)
Other
Austin and Solomon, The Antitrust Implications of
Compensating Balances, 58 Va. L. Rev. 1 (1972) 10
116 Cong. Rec. 32124-9 (1970)... , 11, 21
60 Federal Reserve Bulletin 729 (1974) /
Office of the Comptroller of the Currency, Banking
Circular No. 31, October 22, 1970 9, 10, 12-14, 22, 25
1970 U.S. Code Cong. & Ad. News 5535 21
iv
+ Nem geome
In THE
Supreme Court of
the United States
Ocrosper Term, 1975
No. .
Ropert A. Mann anv Bank or Tue SoutHwest,
NATIONAL ASSOCIATION,
Petitioners
Vv.
Unrrep States or AMERICA,
Respondent
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
2
Ropert A. Mann and Bank or THE SoutHwest NaTIonaL
Association, (referred to herein as Petitioners) petition
the Court to grant and issue a Writ of Certiorari to review
the judgment entered in this criminal case by the United
States Court of Appeals for the Fifth Circuit on August
7, 1975. This case involves the legality of a common bank-
ing practice known as a “compensating balance” loan, and
is a case of first impression.
OPINIONS OF THE COURTS BELOW
The opinion delivered in the Court of Appeals upon the
rendering of the judgment sought to be reviewed appears
in Appendix A (unreported at this time). The unreported
Memorandum Opinion delivered in the District Court
appears in Appendix B.
JURISDICTION OF THE SUPREME COURT
The Court of Appeals’ judgment was entered on August
7, 1975. The Petitioners’ timely Petition for Rehearing
was denied on September 25, 1975. Title 28 United States
Code, § 1254(1), and U.S. Sup. Ct. R. 22(2) confer on this
Court jurisdiction to review the judgment in question in
this important criminal case by Writ of Certiorari.
QUESTIONS PRESENTED FOR REVIEW
1. Whether this criminal indictment, clarified by the
Bill of Particulars, which alleges that the object of the
conspiracy was to be accomplished by an agreement
between Petitioners to cause funds of the First National
Bank of Waco to be deposited in and to remain on deposit
in the demand account of the First National Bank of Waco
at Bank of the Southwest, as a condition to the making
of a secured loan by Bank of the Southwest to Robert
Mann at a low rate of interest, is sufficient to state the
offense of conspiracy to willfully misapply funds of the
First National Bank of Waco (conspiracy under 18 U.S.C.
§ 371 to violate 18 U.S.C. § 656).
3
2. Whether the indictment, clarified by the Bill of Par-
ticulars, which alleges facts that do not constitute a mis-
application of funds under 18 U.S.C. § 656, will be held
sufficient to state an offense merely because it contains a
legal conclusion, inconsistent with the well-pled facts con-
tained in the indictment and Bill of Particulars, that
monies were to be “willfully misapplied.”
3. Whether prosecution of this case would deprive Peti-
tioners of due process of law because of lack of fair notice
that the acts with which they are charged were prohibited
by law, where, as here, (a) there is complete silence in
the statute [18 U.S.C. § 656] and in its legislative history
in regard to utilizing correspondent accounts as compen-
sating balances for loans to bank officers being a criminal
act; (b) Petitioners had no notice that such conduct was
criminal; (c) such loan practice was common and wide-
spread in the highly regulated banking history; (d) tere
had been no prior prosecutions; and (e) the Government
had made public statements that were both confusing and
misleading.
4. Whether the Court of Appeals erred in holding that
Petitioners were precluded from offering evidence at the
Rule 12 hearing on Motion to Dismiss to prove lack of fair
notice to Petitioners that the conduct with which they were
charged was criminal and to prove a violation of Peti-
tioners’ constitutional right of due process, which defenses
reiated to defects in the institution of the proceedings and
were capable of determination without trial of the gen-
eral issue.
4
CONSTITUTIONAL PROVISIONS, STATUTES AND
REGULATIONS INVOLVED
Constitution
Constitution of the United States, Fifth Amend-
ment
Statutes
12 U.S.C. § 371a
18 U.S.C. § 371
18 U.S.C. § 656
Federal Rules of Criminal Procedure
Rule 12
Regulations or Directives
Office of the Comptroller of the Currency, Bank-
ing Circular No. 31, October 22, 1970.
All of the above are set forth in Appendix C.
STATEMENT OF THE CASE
A. Course of Proceedings
On June 18, 1973, a federal grand jury in Houston,
Texas, returned a one count indictment [R. 3] charging
that Ropert A. Mann [“Mann”] and Bank or Tue Souts-
west, NationaL Association (“BSW”), of Houston, Texas,
the Petitioners, committed an offense against the United
States by violating the general conspiracy statute, 18 U.S.C.
§ 371. The basis of the District Court’s jurisdiction is 18
U.S.C. § 3231.
By Bill of Particulars [R. 13], the non-interest bear-
ing account referred to in the indictment was identified
as the demand deposit account of the First National Bank
of Waco at Bank or Tue Soutuwest. The Bill of Partic-
ulars further clarified the indictment by stating that the
only account into which it was charged that monies of the
First National Bank of Waco were placed was this demand
account.!
' Having identified the account into which it is charged that the
funds of the First National Bank of Waco were deposited and
remained as the demand account of the Waco bank at the Bank
-
5
The Government charged that the Petitioners’ object of
the conspiracy was the commission of an offense in viola-
tion of the misapplication of bank funds statute, 18 U.S.C.
§ 656.?
of the Southwest in the Bill of Particulars, the scope of the
Government's proof at trial is strictly limited to the yn
which it has ost United States v. Haskins, F.2d lil
5th Cir. 1965); United States v. DePugh, 266 te WY 435
tw. D. Mo. 1967); United States v. nan ta F.2d 812 (2d Cir.
1962), cert. denied 369 U.S. 828, 7 L.Ed.2d 794. Accordingly, in
determining the sufficiency of the indictment in each instance in
which reference is made to a “non-interest bearing account”, the
indictment should be read as if it charged that the account in
uestion was the demand account of the Waco bank at Bank of
Southwest.
2In the indictment, the Grand Jury charged (as clarified by the
Bill of Particulars in brackets):
Beginning on, or about, December 9, 1969, and continuing
to on, or about, February 28, 1972, within the Houston Division
of the Southern District of Texas, defendants, ROBERT A.
MANN, Chairman of the Board of Directors and Chief Execu-
tive Officer of First National Bank of Waco, Waco, Texas and
BANK OF THE SOUTHWEST, NATIONAL ASSOCIATION,
Houston, Texas, and unindicted tor, Weyman W.
Horadam, Senior Vice-President of B of the South
National Association, Houston, Texas, and divers other persons
whose names are to the Grand jury unknown, combined,
conspired, agreed and confederated to commit an offense
against the laws of the United States, to-wit: to knowingly and
willfully misapply monies and funds of the First National Bank
of Waco, a national bank and a member bank, with intent
to injure and defraud said bank by causing said monies and
funds to be converted to the use, benefit and advantage of
the defendant, ROBERT A. MANN, in violation of Title 18,
United States Code, Section 656.
The object of the conspiracy was to be accomplished as
follows:
The defendant, ROBERT A. MANN, was to acquire con-
trolling interest in the stock of First National Bank of Waco
for the purchase price of approximately $6,900,000.00.
To finance the purchase of the aforesaid stock, the defendant,
ROBERT A. MANN, was to borrow $6,900,000.00 from the
defendant, BANK OF THE SOUTHWEST.
Unindicted co-conspirator Weyman W. Horadam was to act
as an officer and agent of defendant, BANK OF THE SOUTH-
WEST, and was to arrange for the defendant, BANK OF THE
——————
6
SOUTHWEST, to lend $6,900,000.00 to the defendant,
ROBERT A. MANN.
The defendant, BANK OF THE SOUTHWEST, was to
extend credit and fund the aforesaid $6,900,000.00 loan to the
defendant, ROBERT A. MANN, at the rate of interest of three
per cent (3%) per annum notwithstanding the fact that the
rime rate of interest per annum charged by the defendant,
ANK OF THE SOUTHWEST, at such time was eight and
one-half per cent (842%).
The defendant, BANK OF THE SOUTHWEST, was to sell
a icipation of $2,900,000.00 of the loan to the defendant,
ROBERT A. MANN, to Republic National Bank, Dallas, Texas,
thereby rendering defendant, BANK OF THE SOUTHWEST’,
extension of credit and funding of the aforesaid loan to the
defendant, ROBERT A. MANN, $4,000,000.00.
To compensate the defendant, BANK OF THE SOUTH-
WEST, for extending and oS the aforesaid $4,000,000.00
loan to the defendant, ROBERT A. MANN, at the pref-
erential rate of interest of three ys cent (3%) per annum, the
defendant, BANK OF THE SOUTHWEST, was to require the
defendant, ROBERT A. MANN, to place on deposit with
defendant, BANK OF THE SOUTHWEST. an amount of
money commensurate with the principal amount of the loan,
to-wit: $4,000,000.00, which money was to be placed in a non-
interest bearing account [the demand account of the Waco
bank] until such time as the said $4,000,000.00 principal was
reduced or was paid in full.
The defendant, ROBERT A. MANN, was to cause
$4,000,000.00 of monies and funds of the First National Bank
of Waco to be placed on deposit in the aforesaid non-interest
conning account [the demand account of the Waco bank] at
the defendant, BANK OF THE SOUTHWEST, whereby the
use, benefit and advantage of said monies and funds was con-
verted from the First National Bank of Waco to the use, benefit
and advantage of the defendant, ROBERT A. MANN.
By reason of the aforesaid $4,000,000.00 to be placed on
deposit in a non-interest bearing account [the demand account
of the Waco bank] at the defendant, BANK OF THE SOUTH-
WEST, the defendant, ROBERT A. MANN, was to receive the
preferential rate of interest on the aforesaid loan of three
cent (3%) per annum, thereby a the defendant, ROBERT
> MANN, approximately $250,000.00 per year in interest
charges.
The defendants, ROBERT A. MANN and BANK OF THE
SOUTHWEST, were to agree that if the $4,000,000.00 principal
was reduced, but not paid in full, by the defendant, ROBERT
A. MANN, then, in such event, the amount of money required
to be ee the defendant, ROBERT A. MANN, in the non-
interest bearing account [the demand account of the Waco
- oo
7
bank] at the defendant, BANK OF THE SOUTHWEST, would
be reduced by an amount commensurate with said reduction
in the principal.
The defendant, KOBERT A. MANN, was to cause the
y ACL LT 9 gl - fay - t=
,000.00 to $3,000,000.00, at which time the defendant,
BANK OF THE SOUTHWEST, was to cause the rate of
interest charged per annum on said loan to be increased from
three per cent (3%) to four per cent (4%), +=
the fact that the prime rate of interest ed by the defend-
ant, BANK OF THE SOUTHWEST, at such time was six per
cent (6% ) per annum.
The defendant, BANK OF THE SOUTHWEST, was to
further permit the defendant, ROBERT A. MANN, to reduce
the amount of money required to be kept on sit in the
aforesaid non-interest bearing account [the demand account of
the Waco bank] at the defendant, BANK OF THE SOUTH-
WEST, from $4,000,000.00 to $3,000,000.00.
The defendant, ROBERT A. MANN, was to cause
$1,000,000.00 of the $4,000,000.00 of monies and funds of the
First National Bank of Waco, Waco, Texas, then and there on
deposit with the defendant, BANK OF THE SOUTHWEST,
to be withdrawn therefrom and was to cause the remainin
$3,000,000.00 of monies and funds of the First National Ban*
of Waco, Waco, Texas to continue to remain on deposit in the
aforesaid non-interest bearing account [the demand account
of the Waco bank] at the defendant, BANK OF THE SOUTH-
WEST, whereby the use, benefit and advantage of said monies
and funds were converted from the First National Bank of
Waco, Waco, Texas, to the use, benefit and advantage of the
defendant, ROBERT A. MANN.
By reason of the aforesaid $3,000,000.00 continuing to re-
main on deposit in a non-interest bearing account (the demand
account of the Waco bank] at the defendant, BANK OF THE
SOUTHWEST, the defendant, ROBERT A. MANN, was to
receive the preferential rate of interest on the aforesaid loan
of four per cent (4%) a. annum, thereby saving the
defendant, ROBERT A. MANN, approximately $110,000.00 per
year in interest charges.
During the existence of the aforesaid loan, the defendant,
BANK OF THE SOUTHWEST, was to receive a constant re-
turn on the loan made to the defendant, ROBERT A. MANN,
at the rate of approximately seven and one-quarter per cent
(7%%) per annum notwithstanding the increase in the rate
of interest charged from three per cent (3%) per annum to
four per cent (4%) per annum and notwithstanding the
decrease in the amount of money required of the defendant,
ROBERT A. MANN, to be kept on deposit at the defend-
ee EOeeeOOOEEEOEOEOEeeeeeEeeee
8
The Petitioners, pursuant to Fed.R.Crim.P. 12, moved
the District Court to dismiss the indictment [R. 15, 27, 83].
The Amended Motion to Dismiss asserted that: (A) the
conspiracy charged as criminal conduct had never been
declared to be a violation of any law, particularly 18 U.S.C.
§656 or 18 U.S.C. §371; (B) the Department of Justice, on
October 22, 1970, had for the first time unlawfully attempted
to proscribe the alleged conduct after the loan had already
been made in December, 1969; and (C) that regardless of
the first two assertions above, the alleged conduct was not,
as a matter of law, a violation of either 18 U.S.C. §656 or
18 U.S.C. §371 because the transfer of bank funds from the
First National Bank of Waco to its correspondent bank
account at Petitioner Bank or THE SoutHwest in Houston,
did not constitute a criminal misapplication of such trans-
ferred funds by Petitioner, Ropert A. Mann.
ant, BANK OF THE SOUTHWEST, from $4,000,000.00 to
$3,000,000.00.
To effect the object of the conspiracy and in furtherance
thereof, the defendants, ROBERT A. MANN and BANK OF
THE SOUTHWEST, and unindicted co-conspirator Weyman
W. Horadam committed divers overt acts, among which are the
following:
1. On, or about, December 12, 1969, defendant,
ROBERT A. MANN and unindicted a
Weyman W. Horadam had a meeting in Houston, Texas.
2. On, or about, December 12, 1969, defendant, BANK
OF THE SOUTHWEST, made a loan to defendant,
ROBERT A. MANN.
3. On, or about, June 11, 1970, defendant, BANK OF
THE SOUTHWEST, renewed the aforesaid loan to
defendant, ROBERT A. MANN.
4. On, or about, January 15, 1971, defendant, BANK
OF THE SOUTHWEST, renewed the aforesaid loan to
defendant, ROBERT A. MANN.
5. On, or about, July 28, 1971, defendant, BANK OF
THE SOUTHWEST, renewed the aforesaid loan to
defendant, ROBERT A. MANN.
6. On, or about, August 26, 1971, defendant, BANK
OF THE SOUTHWEST, renewed the aforesaid loan to
defendant, ROBERT A. MANN.
Seaton oi Title 18, United States Code, Section 371)
Italics added. ]
9
On July 23, 1974, the District Court, after an extensive
hearing [R. 193], rendered a judgment dismissing the
indictment on eight grounds, inter alia, that the indictment
failed to charge an offense; that the Petitioners had been
deprived of due process of law because 18 U.S.C. $656 as
applied in this case is too vague and indefinite to sustain
a criminal prosecution; that this prosecution constituted an
ex post facto application of law; and that the manner in
which the Government had attempted to prosecute the
Petitioners denied them due process of law. [App. B at
B-1].
The Government, pursuant to the Criminal Appeals Act,
18 U.S.C. §3731, then appealed to the United States Court
of Appeals for the Fifth Circuit to reverse the District
Court’s judgment. The Court of Appeals reversed the
District Court’s judgment on all eight grounds [App. A].
It is the Court of Appeals’ judgment that Petitioners ask
this Court to review.
B. Background of Proceedings
The record reveals the absence of any federal statute or
regulation that has ever placed a prohibition on “com-
pensating balance” loan practices until the Comptroller of
the Currency issued Circular No. 31 on October 22, 1970
[App. C at C-6].
The Government charged in the indictment that, in con-
nection with BSW’s loan to Mann, Mann “was to cause the
acquired Waco bank to place additional funds on deposit
with the Houston bank into the Waco bank’s regular
demand deposit account at or near the time that Mann
made his loan, and that the transfer of such funds by the
Waco bank to its Houston correspondent bank would
constitute a criminal misapplication of such funds by
MANN. According to the Government, the Waco bank
would thus be deprived of the “use, benefit, and advantage”
10
of these funds by MANN*; even though the Government
admitted in its Bill of Particulars and on oral argument that
such transferred funds were to be placed in the Waco bank’s
regular correspondent demand deposit account at the
Houston bank [R. 13, 296, 297, 298, 308].
At the time the loan was made in December, 1969, well-
established banking rules and regulations existed; but
none of these rules and regulations notified the Petitioners
that such admittedly common and widespread “compensat-
ing balance” loan practices were or could conceivably be
argued to be a violation of a criminal statute.
Nonetheless, the Government returned the indictment
in this, the first case in the nation’s banking history in
which individuals were so indicted, and which represents
the Government’s initial effort to create a crime pursuant
to the elements set forth in Circular No. 31.
There seems little doubt of the vital significance of this
case and the desperate need for review.
This test case stands in sharp contrast to the background
preceding the indictment. The record clearly reveals:
(1) The long course of common and almost universal
practice in the banking industry of transacting such loans.
The most exhaustive article on the subject of compen-
sating balances is found in an excellent discussion in Vir-
ginia Law Review. The article states in part:
“The significance of compensating balance require-
ments derives, in part, from their widespread use in
3The Court of pao ignored Petitioners contention that the
indictment is defective on its face in that it includes language
not contained in 18 U.S.C. § 656. The statute makes criminal
willful misapplication of “monies, funds and credits”. In its
allegation of the manner in which the object of the co
was to be accomplished, the indictment alleges “whereby the use,
benefit and advantage of said monies and funds were converted”.
It is not charged that the monies, funds or credits were them-
selves ap of A italicized words in the indictment
cannot be su y statute nor by any cases interpretin
the statute [emphasis addedj. aed °
Fa a ae Se ee ee
11
this country. Studies conducted by Robert Morris
Associates in 1954 and in 1958 indicate that over two-
thirds of the nation’s largest banks imposed compen-
sating balance requirements for the extension of credit
lines, while over half imposed the requirement on
specific loans. A 1964 survey of five hundred banks
throughout the country confirmed the prevalence of
the arrangement... Additional studies, and a sub-
stantial body of literature, support the conclusion that
the compensating balance convention is an entrenched
practice in the banking industry.” Austin and Solo-
mon, The Antitrust Implications of Compensating Bal-
ances, 58 Va. L. Rev. 1, 3 (1972) [emphasis added].
There is no dispute that the practice is common and
widespread. In the fall of 1970, Assistant Attorney General
Richard W. McLaren, Antitrust Division of the Justice
Department, wrote a letter to Congress in which he urged
that “compensating balance” loans not be outlawed under
the 1970 amendments to the Bank Holding Company Act
[12 U.S.C. § 1972 (1970) J:
“However, since then, it has been brought to our atten-
tion that the [proposed] language contained in Sec-
tion 104(b) [now Title I, Section 106(b), Pub. L.
91-607, Dee. 31, 1970, 84 Stat. 1766] may cover a
variety of traditional banking arrangements on which
the Committee has received no testimony or other
evidence. These include the traditional practices of a
bank’s asking its loan customers to maintain compen-
sating balances as partial compensation for a loan, and
calling upon correspondent banks to maintain corres-
pondent balances as compensation for services. Sec-
tion 104(b) may also reach various traditional loan
agreement restrictions which are based on credit con-
siderations (¢.g., prohibitions on additional borrow-
ing). Since these practices are almost universal and
may serve necessary banking functions, we believe
they should not be outlawed, or placed in doubt, with-
out careful prior study.” 116 Cong. Ree. 32125 and
32126. (1970) (emphasis added. )
12
During this same period, in the fall of 1970, Assistant
Attorney General Will Wilson, Criminal Division of the
Justice Department, directed the Comptroller of the Cur-
rency, to notify all national banks on October 22, 1970,
through Circular No. 31, for the first time that “compen-
sating balances” “might be” a violation of 18 U.S.C. § 656,
“no cases” at that time so held. As quoted in Circular 31,
Wilson specifically noted that the loan practice was “fairly
widespread” [R. 961] [emphasis added. ]
Thus, in the fall of 1970, two major divisions of the
Justice Department recognized that this loan practice was
“traditional” and “fairly widespread,” but took divergent
and confusing views in public statements. The Antitrust
Division was stating the practice “. .. may serve necessary
banking functions . . .” and should not be outlawed or
placed in doubt without careful study, while at the same
time the Criminal Division was telling the same banking
industry that such practices might be a violation of law.
(2) The banking industry’s lack of prior notice that such
“compensating balance” type loans were or could reason-
ably be construed to be a violation of any criminal statute,
and the widespread confusion and concern which still exists
in the industry today.
The record is devoid of any public notice whatsoever by
any government agency that the loan in question might
even be considered a violation of any criminal statute
until October 22, 1970, when Circular No. 31 was issued,
ten (10) months after the loan here was made in Decem-
ber, 1969.
The Comptroller of the Currency commented upon the
lack-of-fair-notice aspect of the case in advising the
Department of Justice on March 21, 1973 that he did not
believe the case warranted federal prosecution [R. 943-944].
The Comptroller stated in part in this letter:
13
“Against this background and considering the date on
which the Mann loan was made, it does not appear
either possible or fair to charge Mr. Mann or the
Bank of the Southwest or the First National Bank of
Waco with a willful violation.” [R. 944] (emphasis
added )*
Even prior to Camp’s letter, the Justice Department
circulated internal memoranda evidencing its own doubts
about the fair notice aspect of prosecuting “compensat-
ing balance” cases. For example, on May 4, 1971, John
C. Keeney, Chief, Fraud Section, wrote a letter to the
United States Attorney in Houston, Texas, stating in
part:
“Although we are satisfied that, in some instances,
this practice clearly evinces a misuse of the funds and
credits of a bank, it is believed that the prevalence of
the practice and the failure of the regulatory agencies
to curtail the activity, will make it difficult to predi-
cate a prosecution on conduct occurring before the
above dates. A defense of good faith and common
practice, would substantially negate criminal intent.
For this reason a prosecution charging misuse of cor-
respondent accounts occurring prior to the date of the
directives [October 22, 1970] would be impractical.
Accordingly, it is our view that the dates of the direc-
tives [October 22, 1970] putting the banks on notice
of possible criminality in these transactions should
generally be the cut-off date for prosecution pur-
poses.” [R. 847-848] (emphasis added)
4 Petitioners urge this Court to read two sealed letters in the record,
which Petitioners have not seen. One letter is from the United
States Attorney in Houston to the Assistant Attorney General,
Criminal Division, Department of Justice, dated . cant
and the reply from the Assistant Attorney General to the United
States Atto in Houston dated | _..... The Govern-
ment tendered these sealed letters to the trial judge, who read
them and ordered them resealed and placed in evidence
[R. 198-199]. Petitioners do not know if the Court of Appeals
read the letters or not, but apparently they relate to reasons why
this particular case should or should not have been prosecuted
under the Circular No. 31 directive.
14
The United States Attorney in Houston, after receiving
Keeney’s letter of May 4, 1971, conducted a very unusual
meeting on May 14, 1971 with various nationa] bank execu-
tives in Houston to explain the new government prosecu-
tion policy under Circular No. 31 to them [R. 849-858].
The confusion concerning the legality of “compensating
balance” loans still exists today. As the Comptroller of
the Currency declared on March 21, 1973:
“The fact is that none of the attempts at clarification
in this grey area have been successful and as of today
bankers still are not sure of the circumstances under
which they safely can maintain on their books simul-
taneously a deposit from a correspondent bank and a
loan to a principal of that bank even though such a
combination is a common and natural occurrence in
many completely legitimate and routine situations.”
[R. 843, at 844]
In fact, the Board of Governors of the Federal Reserve
System has approved three of such loans by approving
bank holding company applications even after the indict-
ment was returned in this case [Appendix D at D-1 through
D-11]}.
Therefore, the background of these proceedings presents
a course of sudden change in government policy, an
attempted retroactive application of that policy, a refusal
of the then Comptroller to refer the case for prosecution,
and, indeed, and most importantly, a confused and bewild-
ered industry including Petitioners that, to this good day,
can go to its government seeking review of its lending
practices and, on one hand, may get approval from the
Federal Reserve System or, on the other, a referral for
prosecution from the present Comptroller. These events
defeat the Government’s basis for this indictment.
—-
15
REASONS RELIED ON FOR THE
ALLOWANCE OF THE WRIT
I. THE DECISION OF THE COURT OF APPEALS CON-
FLICTS WITH THE APPLICABLE PRINCIPLES ESTAB-
LISHED BY THIS COURT IN THAT THE COURT OF
APPEALS ERRED IN FAILING TO AFFIRM THE HOLDING
OF THE TRIAL COURT THAT:
A. The Indictment, as clarified by the Bill of Particulars,
fails to state the offense of conspiracy under 18 U.S.C.
§ 371 to willfully misapply funds of a national bank as
prohibited by 18 U.S.C. § 656.
Argument
The indictment purports to charge a conspiracy to vio-
late 18 U.S.C., Section 656. However, when the indictment
is read together with the clarification made by the Bill of
Particulars, it becomes crystal clear that what it is charged
that the Petitioners agreed to do was not unlawful. The
agreement Petitioners are alleged to have made does not
constitute a criminal misapplication of funds of the Waco
bank.
The holding of the Court of Appeals is in direct conflict
with the decisions made and the principles established by
the Supreme Court in United States v. Britton, 107 U.S.
655, 2 S.Ct. 512, 27 L.Ed. 520, (1883) ; United States v. Brit-
ton, 108 U.S. 193, 2 S.Ct. 526, 27 L.Ed. 701 (1883) ; United
States v. Northway, 120 U.S. 327, 7 S.Ct. 580, 30 L.Ed.
664 (1887); and United States v. Heinz, 218 U.S. 532, 31
S.Ct. 98, 54 L.Ed. 1139 (1910). |
This Court has held that to constitute an offense of will-
ful misapplication there must be an actual conversion of a
bank’s funds and the indictment must aver such a con-
version.
In the first Britton decision supra, this court said:
“We think the willful misapplication made an offense
by this statute [Rev.Stat. § 5209] means a misapplica-
tion for the use, benefit, or gain of the party charged,
16
or of some company or person other than the [bank].
Therefore, to constitute the offense of willful mis-
application, there must be a conversion to his own use
or the use of some one else of the moneys and funds
of the [bank] by the party charged. This [is an]
essential element of the offense...” 2 S.Ct. at 522
(emphasis added.)
In United States v. Northway, supra, this Court cited the
Britton case as holding that:
“...it was held to be of the essence of the criminality
of the misapplication that there should be a conver-
sion of the funds to the use of defendant, or of some
other person other than the [bank], with intent to
injure or to defraud the [bank] .. .” 7 S.Ct. at 583.
In the later case of United States v. Heinz, supra, the
foregoing cases were cited with approval, and the Court
stated:
“These cases establish that there must be, to consti-
tute a misapplication of the funds of the bank, a con-
version .. .” 31 S.Ct. at 101.
This Court has never deviated from the rule that to con-
stitute a willful misapplication there must be an actual
conversion of a bank’s funds.®
The indictment, as clarified, alleges that the object of the
conspiracy was to be accomplished by Petitioners’ agree-
ment “to cause” funds of the First National Bank of Waco
to be deposited in and to remain on deposit in the demand
account of the First National Bank of Waco at Bank or THE
SouTHWEsT as a condition to the making of a secured loan
by the Bank or THE SourHwest to Rosert Mann at a low
rate of interest.
As a matter of law, no conversion of funds by Peti-
tioner’s of the Waco bank could have occurred. The monies
5 Congressional revision of the statutory provisions now codified as
18 U.S.C. § 656 has made no attempt to change this settled inter-
pretation.
—~
17
in the bank’s own demand account were never lost to or
beyond the control of the Waco bank. Britton, Northway,
and Heinz (supra, p. 15)
By statute [12 U.S.C. 371a], all such demand accounts
are required to be non-interest bearing; consequently, the
Bank or THe Sovuruwest could not pay interest on the
Waco bank’s demand account, and the funds in the demand
account were legally subject to the Waco bank’s with-
drawal.®
Clearly, the words “willfully misapplies” as used in § 656
mean a criminal misapplication rather than a mere act of
maladministration. United States v. Britton, supra. Also,
the words “willfully misapplies” have no settled technical
meaning like the word “embezzle” or the words “steal”,
“take”, and “carry away”, as used at common law. They do
not, therefore, of themselves fully and clearly set forth
every element of the offense charged. For this reason, it
is not sufficient simply to aver that Petitioner “willfully
misapplied” the funds of a bank. There must be averments
to show how the misapplication was made and that it was
an unlawful one. United States v. Britton, supra, 2 S.Ct.
at 524.
Furthermore, this indictment, clarified by the Bill of
Particulars, cannot be held sufficient to state an offense
merely because it contains legal conclusions of “misapplica-
tion” by Petitioners, which conclusions are inconsistent
with the well-pled facts. The well-pled facts of the indict-
ment reveal that the Waco bank was to be caused to place
its own funds in its own bank account at BSW. Therefore,
the mere legal conclusion that such acts were to constitute
“misapplication” cannot save the defect in the indictment.
®The “©The dut owed by a bank to its yey is to pa oo eet
United States v. Guaranty Trust New Yor 00 F.2d 369,
2d Cir., 1938), at p. 371. See also nderson National Bank v.
uckett, 321 US. 64 S.Ct. 599, 88 L.Ed.2d 692 (1944), 64
S.Ct. at p. 607.
18
The Court of Appeals has erred in so holding and in so
doing is in conflict with the decision of that court in United
States v. Strauss, 283 F.2d 155, 158 n. 6 (5th Cir. 1960),
as well as in conflict with the decision of this Court in
United States v. Britton, supra (107 U.S. 655, 668).7
This indictment charges Petitioners with conspiracy to
perform acts which are neither individually nor in com-
bination a violation of any law of the United States. The
mere legal conclusion that monies were to be wilfully mis-
applied (which is in itself contrary to the well-pled facts)
is not sufficient to state the offense which the indictment
purports to charge.
B. This prosecution deprives Petitioners of due process of
law because the Petitioners did not have prior notice that
the acts charged were criminal acts.
Argument
The Court of Appeals’ decision conflicts with applicable
principles of this Court concerning the judiciary’s policy
in eases where the Justice Department seeks to expand the
use of criminal statutes beyond a reasonable point, and
particularly in complex situations involving no fair notice
or warning to Petitioners in advance of the abrupt change
in prosecution policy. A decision by this Court becomes
even more urgent when it is noted that Circular No. 31, the
basis of this prosecution, was never considered by Congress
and that the Comptroller of the Currency never held any
hearings nor provided the banking industry with any clear
guidelines to govern their lending practices.
The Court of Appeals, in off-hand fashion, held merely
that because the misapplication statute (18 U.S.C. § 656)
was “old” and “long predated the present prosecution, the
indictment is not prohibited by the ex post facto clause”
[Appendix A, at A-15).
7 The indictment is also defective because the words “were to
cause” ed meg to allege the crime of a lica-
= a a, States v. Britton, 108 U.S. 193, 2 S.Ct.
1 (1883) (2 S.Ct. at p. 529).
19
The Court of Appeals’ decision sought to distinguish this
Court’s well-reasoned holdings and rationale of United
States v. Laub, 385 U.S. 475, 87 S.Ct. 574, 17 L.Ed.2d 526
(1967), and Raley v. Ohio, 360 U.S. 423, 79 S.Ct. 1257, 3
L.Ed.2d 1344 (1959), as well as the Circuit’s own recent
decision, United States v. Insco, 496 F.2d 204 (5th Cir.
1974). The Circuit totally ignored this Court’s holding in
Bouie v. Columbia, 378 U.S. 347, 84 S.Ct. 1697, 12 L.Ed.2d
894 (1964).
It is clear that these Supreme Court decisions trace the
preservation by this Court of a fundamental principle
designed to protect the constitutional concept of fair notice
or warning. Raley (1959), Bowie (1964), and Laub (1967)
reflect a consistent concern by this Court over Government
attempts to expand criminal statutes. Raley concerned the
Government’s “active misleading” of the defendant, and
stated the principle that “vague and undefined” commands
afford no fair warning to citizens of what conduct might
expose them to prosecution. [79 S.Ct. 1266]. Bowie also
applied the basic principle that a criminal statute give fair
warning, and again recognized that the fair notice principle
applies to retroactive criminal prohibitions emanating from
courts as well as legislatures.
Executive Department expansion of a criminal statute
was held equally defective three years later in Laub. Laub’s
fact situation is similar to that herein. In Laub, the Jus-
tice Department contended that although Section 215(b) of
the Immigration & Nationality Act of 1952, regulating pass-
port travel, did not “. . . in so many words. . .” prohibit
violations of area restrictions, that the text was broad
enough to encompass departures for geographically restric-
ted areas [87 S.Ct. at 577-578]. This Court disagreed and,
in so holding, stated the governing principle here:
“Crimes are not to be created by inference. They may
not be constructed nunc pro tunc.” 87 §.Ct. at 581.
20
This Court then set out prior decisions setting forth
circumstances where a defense of no fair notice had been
sustained, such as “authoritative assurances” by the Gov-
ernment; “vague and undefined” commands; “inexplicably
contradictory” commands; or “active misleading” by the
Government.
The Court of Appeals’ decision here held that although
certain features of Raley and Laub were present, such as
widespread practices and an absence of prior prosecutions,
that because the Government had never approved the mak-
ing of such loans nor vouched for the propriety of such
transactions, Governmental silence did not constitute
“affirmative assurance” or “active misleading”, and thus
Raley and Laub were not applicable [Appendix A, at
A-17].
But the history of Governmental policy of these loans
clearly establishes that not only were the policies of various
agencies of the Federal Government in a state of flux, but
also that these agencies were holding public hearings in
Washington three years before the indictment and per-
forming acts constituting “active misleading” in this com-
plex area of banking law.
Reference has already been made above to the conflict-
ing opinions concerning the legality of compensating
balance lending practices expressed in correspondence
from the Comptroller of the Currency and the Department
of Justice [at pp. 11-14 herein]. In addition, public testi-
mony and evidence before the Senate Banking Committee
in September, 1970 on proposed amendments to the Bank
Holding Company Act of 1956 reveal a clear intention on
the part of both committee members and Treasury officials
to draft such amendments carefuily so as not to outlaw
traditional and unobjectionable compensating balance loans
in circumstances similar to the one involved in the instant
case. For example, Samuel R. Pierce, Jr., general coun-
sel, Department of the Treasury, told the Committee that
21
his agency was generally “...in favor of an anti-tying
provision being included in the bill but [did] not believe
it should cover traditional banking arrangements such
as requiring a loan customer or a correspondent bank to
maintain certain balances as compensation for a loan or
for services rendered the #rrespondent bank.” 116 Cong.
Rec., at 32128 (1970). Similar views were expressed by
Senators Bennett and Brooke and by Arthur F. Burns,
Chairman, Board of Governors, Federal Reserve System.®
116 Cong.Rec. at 32124-32129 (1970).
The Senate report on the bill contains similar assur-
ances. The Senate Committee on Banking and Currency
told the regulatory agencies, particularly the Federal
Reserve Board, that it (the Senate) “...expects that by
such regulation or order the Board will continue to allow
appropriate traditional banking practices.” 1970 U.S. Code
Cong. & Ad. News, 5535. [emphasis added }
Thus, there was “affirmative assurance” or “active mis-
leading” by the Government in 1970 which calls into sharp
focus the holdings in Raley and Laub. The record shows
here that, even though the Government was given an
opportunity to rebut this evidence, it did not do so.
8 Chairman Burns’ opinion is particularly enlightening:
“ . . ‘Similarly, the language is not intended to effect bank
corre pes oy F insures that traditional corre-
relationships cannot be perverted by being tied to or
conditioned upon maintenance or establishment of relationships
with nonbank subsidiaries of bank holding companies, or with
businesses operated within the bank or by the people control-
ling a bank. Also, the language is not intended to prevent such
traditional banking practices which protect extensions of credit
by agreement to restrict other borrowing, but insures that such
agreements may not be tied to or conditioned upon an agree-
ment not to do business with competitors of other subsidiaries
of the bank holding company, the bank, or of the operators of
the bank.’
The Board believes that it is better to include exemptions in
the statute than to leave them to administrative discretion, and
accordingly we recommend adoption of the amendment.” (at
32126) (emphasis added. )
22
The Court of Appeals also gravely erred by holding
that because the indictment charged violations of 18 U.S.C.
4 656 oceurring after Cireular No. 31 (October 22, 1970)
by virtue of subsequent renewals of the loan, that the
Raley and Laub defense could not apply. The Court held
that because the Vetitioners, at the time of the renewals
in 1971 would have been put on notice of Circular No. 3],
that the Petitioners’ “fair notice” defense was not valid.
This holding directly conflicts with a well-established
decision of this Court 90 years ago in Coffin v. United
States, 156 U.S. 482, 15 S.Ct. 394, 40 Ld. 1109 (1895).
Coffin held that renewals of a loan did not constitute addi-
tional crimes in a misapplication indictment. Thus, the
Court of Appeals erred in so holding. As a conspiracy
indictment, this case must stand or fall on whether the
alleged agreement to make the loan was an unlawful agree-
ment to make the original alleged misapplication, not on
the basis of the renewals. Therefore, Raley and Laub are
stil) relevant to the defense.
Finally, the Court of Appeals refused to apply its own
doctrine as decided in United States vy. Insco, 496 F.2d 204
(Sth Cir. 1974), which reversed a finding of guilt where
the defendant was “inadequately apprised” of the provi-
sions of law governing his conduct. The Circuit held there
that there was no significant evidence that Congress
intended the acts to be covered although the acts could be
of such a nature to fall within the statute [496 F.2d at
208); and that three interrelated factors deprived the
defendants there of fair notice:
1. Absence of legislative history, even though Congress
was presumed to know of the existence of the prohibited
material;
2. Vresence of a universal practice ;
4. Absence of any prosecutions.
23
The Circuit stated in Jnsco that by the combination of
these factors and the absence of judicial decisions, the
defendant was “lulled” into the reasonable impression that
his conduct did not violate the law because defendant
“lacked authoritative guidance” [496 F.2d at 208-209],
Although all of these factors were present here to “lull”
these Petitioners into relying on Government inaction, the
Circuit erroneously held Insco did not apply here [Ap-
pendix A, at A-17, 0.7}.
ii. THE COURT OF APPEALS DECIDED AN IMPORTANT
QUESTION OF LAW WHICH HAS NOT BEEN, BUT
SHOULD BE, SETTLED BY THIS COURT BECAUSE THIS
CASE INVOLVES THE NATION’S ENTIRE NATIONAL
BANKING INDUSTRY AND IS A CASE OF FIRST IMPRES-
SION IN THIS COURT, THE INDICTMENT PRESENTS
ALLEGATIONS OF FACT NOT HERETOFORE BELIEVED
BY THE BANKING INDUSTRY TO CONSTITUTE A
CRIME, NOR EXPRESSLY PROHIBITED BY ANY STA-
TUTE OR REGULATION, AND INVOLVING A PRACTICE
WHICH THE DEPARTMENT OF JUSTICE CONCEDES TO
BE COMMON AND WIDESPREAD. IN ADDITION, THE
TRANSACTION FOR WHICH PETITIONERS HAVE BEEN
INDICTED AS CONSTITUTING A WILLFUL MISAPPLI-
CATION OF BANK FUNDS WITHIN THE MEANING OF
18 U.S.C. § 656 HAS BEEN TREATED INCONSISTENTLY
BY THE COMPTROLLER OF THE CURRENCY AND THE
DEPARTMENT OF JUSTICE, CAUSING WIDESPREAD
CANFUSION IN THE BANKING INDUSTRY, AND IS OF A
TYPE WHICH 18 STILL BEING SANCTIONED BY THE
FEDERAL RESERVE BOARD.
Argument
This Court should settle the important question of fed-
eral law for two principal reasons.
1. The Court of Appeals’ Decision Conflicts With Rul-
ings of the Federal Reserve System.
The Board of Governors of the Federal Reserve System
has considered in three cases the applications of bank
24
holding companies to acquire the shares of a bank with the
proceeds of a loan at a preferential rate on the implied
condition that the lender will profit from the transactions
by receiving a compensating balance as part of the acquired
banks’ correspondent accounts. [Decisions attached hereto
in Appendix D, at D-1 through D-11]
The minority of the Board of Governors has expressly
condemned “compensating balance” loans, yet the major-
ity, including Chairman Burns, continues to approve such
loans.°®
The Board has either repudiated or substantially con-
flicted with the position of the Justice Department with
respect to the construction of Section 656 in a bank holding
company context.
9A y uae dissent points out the divergence of views within the
Federal Reserve System:
“We would deny this application for the reason that we
believe it is not in the public interest to sanction an arrange-
ment whereby owners of 80 per cent of the shares of Bank
secured a loan to purchase such shares at a preferential rate
Fp cent) on the implicit condition that the lending bank
ill profit from the transaction by receiving a compensating
balance as part of Bank’s correspondent account. Thus, Bank’s
resources are being used to subsidize the personal interests of
shareholders owning 80 per cent of the b
In our view, if bank stock loans are to be made, they should
be made on the same basis as stock collateral loans in general.
We are concerned that such preferential loans could result in
conflict of interest or breach of fiduciary duty on the part of
tie borrowing officer or director if the reduction in the interest
rate is conditioned on the maintenance of correspondent
balances with the lending bank. Accordingly, in our judgment,
the Board should not approve this holding company application
and thereby sanction the use of such preferential loans.
A further concern of ours, though one which does not appear
to be present in the facts of record involved in this case, is that
the making of bank stock loans at less than the prevailing
interest rate may be a means whereby a lending cad without
the necessity of securing prior Board approval, acquires indirect
— by the borrowing bank’s shares which are pledged as
collateral.
For the foregoing reasons, we would deny the application.”
[60 Federal Reserve Bulletin, 729, 730]
25
2. Impact Of The Decision On The Banking System.
The issuance by the Justice Department of Circular No.
31 resulted in unnecessary confusion and apprehension in
the American banking industry. The Office of the Comptrol-
ler of the Currency emphasized this uncertainty in a letter
to Henry E. Peterson, Assistant Attorney General, Crim-
inal Division, on March 21, 1973 [R. 843]. According to the
Comptroller:
“(S)ince dissemination of Mr. Wilson’s memo in 1970,
there has been widespread confusion and concern
among bankers as to what combination of facts would
give rise to a violation. . . . The fact is that none of
the attempts at clarification in this grey area have
been successful and as of today bankers still are not
sure of the circumstances under which they safely can
maintain on their books simultaneously a deposit from
a correspondent bank and a loan to a principal of that
bank even though such a combination is a common and
natural occurrence in many completely legitimate and
routine situations.” (emphasis added.) !°
Furthermore, if the decision of the Fifth Circuit is
allowed to stand, confusion similar to that resulting from
the issuance of Circular No. 31 will occur in the banking
industry. The Fifth Cireuit decision lends only more con-
fusion to members of the banking profession sorely in need
of proper guidance and who now must determine daily when
an “interbank deposit” shifts in character from a normal
“eorrespondent account” to a prohibited “compensating
balance”; when the interest rate on a loan to a bank official
changes from a rate permitted under our concepts of pri-
vate contract to a prohibited “preferential” rate; and when
10While total figures for all banks across the nation are not
available, the record indicates that 110 ——— cases involving
transactions similar to the one for which Petitioners are being
prosecuted herein exist in the records of the United States
Attorney for the Southern District of Texas [R. 781], and if the
Fifth Circuit decision ey & the law, there are at least
110 other members of the king community who will be
exposed to the uncertainty of criminal tion under the
broadened interpretation of 18 U.S.C. § 656.
26
a loan to a bank officer at a rate which is not “preferential”
but requires a “compensating balance” from the officer’s
bank violates 18 U.S.C. § 656.
Since all banks must maintain a large portion of their
total assets in the form of cash due from other banks, and
since loans to officers of correspondent banks are “common
and natural occurrences” in the industry, as substantial a
change in the law as is contemplated by the Fifth Circuit
opinion should be reviewed by this Court.
Ill. THE COURT OF APPEALS, IN ITS DECISION, HAS SO
FAR DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS AS TO CALL FOR
THIS COURT’S POWER OF SUPERVISION. THE COURT
OF APPEALS HELD THAT AT A RULE 12 HEARING ON
MOTION TO DISMISS THE DEFENSES OF LACK OF
FAIR NOTICE TO THE PETITIONERS AND OF VIOLA-
TION OF PETITIONERS’ CONSTITUTIONAL RIGHT OF
DUE PROCESS WERE NOT CAPABLE OF DETERMINA-
TION BASED ON UNDISPUTED EVIDENCE WITHOUT
TRIAL OF THE GENERAL ISSUE.
Argument
The holding conflicts with United States v. Laub, 385
U.S. 475, 87 S.Ct. 574, 17 L.Ed.2d 526 (1967).
Such a holding emasculates the purpose of Fed. R. Crim.
P. 12, and denies a defendant the right to present evidence
of defenses capable of determination at a pre-trial hearing
and impairs the District Court’s ability to make findings on
undisputed evidence.
The Court of Appeals’ holding disrupts orderly criminal
pre-trial hearing procedure on two vital points, i.e., what
defenses are capable of determination without a trial, and
what evidence is admissible to support the trial court’s
findings.
This Court has held that under Fed. R. Crim. P. 12, it was
appropriate for Petitioners to raise defenses relating to
due process of law at a pre-trial hearing. United States v.
27
Laub, 385 U.S. 475, 87 S.Ct. 574, 17 L.Ed.2d 526 (1967).
The record in Laub reveals the indictment was dismissed
without a trial and Petitioners’ defenses were established
by evidence of Government press releases, Government
public notices, and records of Congressional hearings.
The Court of Appeals here held Petitioners’ evidence not
only did not prove circumstances of a Laub fair notice
defense, but also was inadmissible at a Rule 12 hearing
because it went to the general issue of intent. The Court of
Appeals did not specify what evidence supported such a
holding. Under Laub, Petitioners were entitled to present
evidence of government conduct to prove their defense of
no fair notice at the hearing on the Motion to Dismiss. The
fact that such evidence may later be admissible at trial to
show lack of specific intent is immaterial.
Furthermore, as this Court held in United States v.
Covington, 395 U.S. 57, 89 S.Ct. 1559, 23 L.Ed.2d 94 (1969),
under similar circumstances, the evidence so presented was
capable of determination without a trial and the Govern-
ment should have, at that time, attempted to rebut the
evidence. (89 S.Ct. at 1561).
The subject of what issues are capable of determination
under Rule 12 has been in urgent need of resolution by this
Court, and, on occasion, has been the cause of apparent
disagreement in this Court, particularly in appeals by the
Government in dismissed cases. United States v. Sisson,
399 U.S. 267, 90 S.Ct. 2117, 26 L.Ed.2d 608 (1970)."' The
Advisory Committee has not defined the subject with much
clarity.
The problem becomes acute when viewed in the context
of this case where classic defenses of fair notice were raised
11 The Court of Appeals apparently misread this Court’s holding in
United States v. Pennsylvania Industrial Chemical Corporation,
411 U.S. 655, 93 S.Ct. 1804, 36 L.Ed.2d 567, (1973), and construed
the holding to mean that Petitioners’ only opportunity to prove a
fair notice defense was at trial.
28 29
and when persuasive, undisputed evidence was produced Attorneys for Petitioner,
fully supporting the trial court’s order of dismissal. The Bank of the Southwest,
Government never rebutted the evidence, yet Petitioners National Association
have been ordered to stand trial because the Court of CuestTer F'uLTON
Appeals failed to properly decide the Laub issue. Fulbright & Jaworski
1 Bank of the Southwest
Building
CONCLUSION | Houston, Texas 77002
For the reasons stated herein, Petitioners pray that this ee
Petition for Certiorari to the United States Court of Houston, Texas 77002
Appeals for the Fifth Circuit be granted. ;
Respectfully submitted,
Attorneys for Petitioner,
Robert A. Mann
SeacaL V. WHEATLEY
Cart Rosin TEAGUE
(On The Brief)
Oppenheimer, Rosenberg,
Kelleher & Wheatley, Inc.
Suite 620, 711 Navarro
San Antonio, Texas 78205
Wiurm R. Ecxuarpt
Vinson, Elkins, Searls,
Connally & Smith
First City National
Bank Building
Houston, Texas 77002
Harotp R. DeMoss, Jr.
Bracewell & Patterson
First City National
Rank Building
Houston, Texas 77002
A-1
APPENDIX A
Opinion and Judgment of the Court of Appeals
United States Court of Appeals
FIFTH CIRCUIT
No. 74-2983
Unrrep States or AMERICA
PLAINTIFF-APPELLANT,
v.
Rospert A. Mann ann BANK OF THE
SouTHWEsT, NaTIONAL ASSOCIATION,
DEFENDANTS-APPELLEES
Aug 7, 1975
Appeal from the United States District Court for the
Southern District of Texas.
Before GIBSON,* THORNBERRY and AINSWORTH,
Circuit Judges.
AINSWORTH, Circuit Judge:
This important criminal case involves the validity of an
indictment charging misapplication of bank funds in con-
nection with a multimillion dollar loan to a bank official at
a preferential rate of interest, conditioned on his bank
depositing an equal amount in a non-interest bearing
account in the lending bank. The district judge dismissed
the indictment for numerous reasons which he assigned.
We disagree with those reasons and reverse.
*Of the Eighth Circuit, sitting by designation.
A-2
I. The Facts
Robert A. Mann, who is Chairman of the Board of Direc-
tors and Chief Executive Officer of the First National Bank
of Waco, Texas, and Bank of the Southwest, National Asso-
ciation of Houston, Texas, were jointly charged in a one-
count indictment with a violation of 18 U.S.C. § 371 by con-
spiring during the period from December 1969 until Febru-
ary 1972 to knowingly and willfully misapply the monies
and funds of the First National Bank of Waco, with intent
to injure and defraud said bank by causing the funds to be
converted to the use, benefit and advantage of the defendant,
Mann, in violation of 18 U.S.C. § 656. Section 656 provides
in pertinent part:
Whoever, being an officer, director, agent or employee
of, or connected in any capacity with any Federal
Reserve bank, member bank, national bank or insured
bank, .. . embezzles, abstracts, purloins or willfully mis-
applies any of the moneys, funds or credits of such bank
or any moneys, funds, assets or securities intrusted to
the custody or care of such bank, or to the custody or
care of any such agent, officer, director, employee or
receiver, shall be fined not more than $5,000 or impris-
oned not more than five years, or both; but if the
amount embezzled, abstracted, purloined or misapplied
does not exceed $100, he shall be fined not more than
$1,000 or imprisoned not more than one year, or both.
In substance, the indictment charged that defendant
Mann was to acquire controlling interest in the First
National Bank of Waco for the purchase price of approxi-
mately $6,900,000, to be financed by a loan in this amount
from defendant Bank of the Southwest. The Republic
National Bank of Dallas was to participate in the loan to
the extent of $2,900,000, leaving $4,000,000 as the amount
of the loan to Mann from Bank of the Southwest. The loan
was to be at the rate of interest of 3 per cent per annum,
notwithstanding the fact that the prime rate of interest
A-3
charged by Bank of the Southwest at the time was 814%
per cent. To compensate Bank of the Southwest for extend-
ing the loan to Mann at the preferential rate of interest of
3 per cent, Bank of the Southwest was to require Mann to
place on deposit with Bank of the Southwest funds of the
First National Bank of Waco in an amount commensurate
with the principal amount of the loan, i.e., $4,000,000, in a
non-interest bearing account until the principal was reduced
or paid in full. Thus, according to the indictment, the
monies and funds of the First National Bank of Waco were
“converted to the use, benefit and advantage of the defend-
ant, Robert A. Mann,” and the preferential 3 per cent loan
saved Mann approximately $350,000 per year in interest
charges.
The indictment further alleged that defendants agreed
that if the $4,000,000 principal was reduced but not paid in
full, the amount of the non-interest bearing account to be
kept by Mann in the Bank of the Southwest would be
reduced by an amount commensurate with the reduction in
principal. Accordingly, when Mann reduced the principal
amount of the loan from $4,000,000 to $3,000,000, the com-
pensating balance of $4,000,000 was also reduced to
$3,000,000, and the rate of interest was increased from 3
per cent to 4 per cent, though Bank of Southwest’s prime
rate at that time was 6 per cent, thus saving Mann $110,000
per year in interest charges.
Finally, the indictment charged that to effect the object
of the conspiracy, and in furtherance thereof, certain
described overt acts were committed. Since the validity and
sufficiency of the indictment are at issue, the full text of the
indictment is reproduced in the margin.!
1The Grand Jury charged:
Beginning on, or about, December 9, 1969, and continuing
to on, or about, February 28, 1972, within the Houston Division
of the Southern District of Texas, defendants, Robert A. Mann,
Chairman of the Board of Directors and Chief Executive Officer
of First National Bank of Waco, Waco, Texas, and Bank of the
Southwest, National Association, Houston, Texas, and un-
A4
indicted co-conspirator, Weyman W. Horadam, Senior Vice-
President of Bank of the Southwest, National Association,
Houston, Texas, and diverse other persons whose names are to
the Grand Jury unknown, combined, conspired, agreed and
confederated to commit an offense against the laws of the
United States, to-wit: to knowingly and willfully misapply
monies and funds of the First National Bank of Waco, a
national bank and a member bank, with intent to injure and
defraud said bank by causing said monies and funds to be con-
verted to the use, benefit and advantage of the defendant,
Robert A. Mann, in violation of Title 18, United States Code,
Section 656.
The object of the conspiracy was to be accomplished as
follows:
The defendant, Robert A. Mann, was to acquire controlling
interest in the stock of First National Bank of Waco for the
purchase price of approximately $6,900,000.00.
To finance the purchase of the aforesaid stock, the defendant,
Robert A. Mann, was to borrow $6,900,000.00 from the de-
fendant, Bank of the Southwest.
Unindicted co-conspirator Weyman W. Horadam was to act
as an officer and agent of def» ridant, Bank of the Southwest,
and was to arrange for the detendant, Bank of the Southwest,
to lend $6,900,000.00 to the defendant, Robert A. Mann.
The defendant, Bank of the Southwest, was to extend credit
and fund the aforesaid $6,900,000.00 loan to the defendant,
Robert A. Mann, at the rate of interest of three per cent (3%)
per annum notwithstanding the fact that the prime rate of
interest per annum charged by the defendant Bank of the
‘sua at such time was eight and one-half per cent
Oj}.
The defendant, Bank of the Southwest, was to sell a partici-
— of $2,900,000.00 of the loan to the defendant, Robert A.
ann, to Republic National Bank, Dallas, Texas, thereby
rendering defendant, Bank of the Southwest's, extension of
credit and funding of the aforesaid loan to the defendant,
Robert A. Mann, $4,000,000.00.
To compensate the defendant, Bank of the Southwest, for
extending and an aforesaid $4,000,000.00 loan to the
defendant, Robert A. Mann, at the preferential rate of interest
of three per cent (3%) per annum, the defendant, Bank of the
Southwest, was to require the defendant, Robert A. Mann, to
place on deposit with defendant, Bank of the Southwest, an
amount of money commensurate with the principal amount of
the loan, to-wit: $4,000,000.00, which money was to be placed
in a non-interest bearing account until such time as the said
$4,000,000.00 principal was reduced or was paid in full.
The defendant, Robert A. Mann, was to cause $4,000,000.00
of monies and funds of the First National Bank of Waco to be
A-5
placed on deposit in the aforesaid non-interest bearing account
at the defendant, Bank of the Southwest, whereby the use,
benefit and advantage of said monies and funds was converted
from the First National Bank of Waco to the use, benefit and
advantage of the defendant, Robert A. Mann.
By reason of the aforesaid $4,000,000.00 to be placed on
deposit in a non-interest bearing account at the defendant,
Bank of the Southwest, the defendant, Robert A. Mann, was
to receive the preferential rate of interest on the aforesaid loan
of three per cent (3%) per annum, thereby saving the defend-
ant, Robert A. Mann, approximately $350,000.00 per year in
interest charges.
The defendants, Robert A. Mann and Bank of the Southwest,
were to agree that if the $4,000,000.00 principal was reduced,
but not paid in full, by the defendant, Robert A. Mann, then in
such event, the amount of money required to be kept by the
defendant, Robert A. Mann, in the non-interest bearing account
at the defendant, Bank of the Southwest, would be reduced by
an amount commensurate with said reduction in the principal.
The defendant, Robert A. Mann, was to cause the aioe
amount of the aforesaid loan to be reduced from $4,000,000.00
to $3,000,000.00, at which time the defendant, Bank of the
Southwest, was to cause the rate of interest charged per annum
on said loan to be increased from three per cent (3%) to four
per cent (4%), notwithstanding the fact that the prime rate of
interest charged by the defendant, Bank of the Southwest, at
such time was six per cent (6% ) per annum.
The defendant, Bank of the Southwest, was to further permit
the defendant, Robert A. Mann, to reduce the amount of money
required to be kept on deposit in the aforesaid non-interest
bearing account at the defendant, Bank of the Southwest, from
$4,000,000.00 to $3,000,000.00.
The defendant, Robert A. Mann, was to cause $1,000,000.00
of the $4,000,000.00 of monies and funds of the First National
Bank of Waco, Texas, then and there on deposit with the
defendant, Bank of the Southwest, to be withdrawn therefrom
and was to cause the remaining $3,000,000.00 of monies and
funds of the First National Bank of Waco, Waco, Texas, to
continue to remain on deposit in the aforesaid non-interest
bearing account at the defendant, Bank of the Southwest,
whereby the use, benefit and advantage of said monies and
funds were converted from the First Nationa! Bank of Waco,
Waco, Texas to the use, benefit and advantage of the defendant,
Robert A. Mann.
By reason of the aforesaid $3,000,000.00 coritinuing to remain
on deposit in a nen-interest bearing account at the defendant,
Bank of the Southwest, the defendant, Robert A. Mann, was
to receive the preferential rate of interest on the aforesaid loan
of four per cent (4%) per annum, thereby saving the defend-
0
A-6
Both defendants filed motions to dismiss the indictment
under Rule 12 of the Federal Rules of Criminal Pro-
cedure, and a hearing was held on the motions as provided
by Rule 12(b)(4) of said rules. Numerous grounds for
dismissal were asserted in these motions, especially that
the allegations contained in the indictment did not state
an offense in violation of any law of the United States,
and further that the indictment should be dismissed
because prosecution thereunder was in violation of several
ant, Robert A. Mann, approximately $110,000.00 per year in
interest charges.
During the existence of the aforesaid loan, the defendant,
Bank of the Southwest, was to receive a constant return on the
loan made to the defendant, Robert A. Mann, at the rate of
approximately seven and one-quarter per cent (7%4%) per
annum notwithstanding the increase in the rate of interest
charged from three per cent (3%) per annum to four per cent
(4%) per annum and notwithstanding the decrease in the
amount of money required of the defendant, Robert A. Mann,
to be kept on deposit at the defendant, Bank of the Southwest,
from $4,000,000.00 to $3,000,000.00.
To effect the object of the conspiracy and in furtherance
thereof, the defendants, Robert A. Mann and Bank of
the Southwest, and unindicted co-conspirator Weyman W.
Horadam committed diverse overt acts, among which are the
following:
1. On, or about, December 12, 1969, defendant, Robert
A. Mann and unindicted ng ing Weyman W. Hora-
dam had a meeting in Houston, Texas.
2. On, or about, December 12, 1969, defendant, Bank
of the Southwest made a loan to defendant, Robert A.
Mann.
3. On, or about, June 11, 1970, defendant, Bank of the
Southwest renewed the aforesaid loan to defendant, Robert
A. Mann.
4. On, or about, January 15, 1971, defendant, Bank of
the Southwest, renewed the aforesaid loan to defendant,
Robert A. Mann.
5. On, or about, July 28, 1971, defendant Bank of the
Southwest renewed the aforesaid loan to defendant, Robert
A. Mann.
6. On, or about, August 26, 1971, defendant Bank of
the Southwest, renewed the aforesaid loan to defendant,
Robert A. Mann.
(Violation: Title 18, United States Code, Section 371)
A-7
provisions of the Constitution, especially the ex post facto
clause of Section 9 of Article 1 and the due process clause
of the Fifth Amendment. Defendants contended, among
other things, that the indictment failed to allege an offense
because the bank loan was lawful at the time it was made,
that the allegations in the indictment were vague and
indefinite, that defendants had been denied due process of
law because the prosecution resulted in an ex post facto
application of criminal statutes, and that the Government
was attempting to regulate private business transactions
by criminal prosecution.
At the hearing the district court allowed the defendants
to introduce into evidence, over strenuous opposition of
the Government, a large volume of documentary evidence,
much of which came from the files of the Government. The
Government’s objection was that defendants were attempt-
ing to try the general issues of fact at the summary hear-
ing on the motions to dismiss. The district judge agreed,
however, with the contentions of defendants and dismissed
the indictment for written reasons which as assigned as
follows:
Based upon the evidence that is not in dispute, and
those facts which have been stipulated, and the mat-
ters of which the Court can take judicial notice, the
Court is of the opinion that the indictment must be
dismissed for the following reasons and none other.
Firstly, the Defendants have been denied due pro-
cess of law.
The Defendants have been denied equal protection
of the law.
The indictment fails to state an offense on its face.
The indictment is too vague and indefinite to sustain
a prosecution.
18 U.S.C. See. 656, as applied in this case, is also too
vague and indefinite to sustain a criminal prosecution.
A-8
This prosecution is precluded because it violates the
ex post facto clause of Section Nine of Article One
of the United States Constitution.
The indictment should be dismissed because it is an
unlawful retroactive application of governmental
policy as it affects this criminal prosecution.
Lastly, the indictment must be dismissed because
it is against the public policy of the United States
to regulate private business by criminal prosecution
as was done in this case. The Court is relying upon the
United States of America vs. Jack P. Ensco [sic], No.
73-3990, Fifth Cireuit, June 21, 1974.
The Court accepts the Defendants’ theory of the law
as it applies to the above reasons for dismissing the
indictment.
For these reasons and for no others, except those
stated above, the Court dismisses the indictment.
This is a FINAL JUDGMENT.
The Government has appealed the dismissal of the in-
dictment under the Criminal Appeals Act, 18 U.S.C. § 3731.
At the outset, defendants contend that the appeal is barred
by the double jeopardy clause of the Fifth Amendment.
They maintain that though the district judge dismissed
the indictment, what he actually did in fact was to acquit
the defendants upon findings of facts outside the indict-
ment which constituted a defense on the merits. Accord-
ingly, we must initially dispose of that issue prior to any
inquiry into the question whether the indictment sufficiently
sets forth a violation of a federal criminal statute, or whe-
ther defendants have been indicted and prosecuted for un-
constitutional reasons requiring dismissal of an otherwise
valid indictment.
A
A-9
II. Double Jeopardy
In arguing that the double jeopardy clause prohibits the
Government’s appeal in this case, defendants rely on United
States v. Lewis, 5 Cir., 1974, 492 F.2d 126. In Lewis, the
trial court dismissed an indictment after an evidentiary
hearing but prior to trial. This Court dismissed the Gov-
ernment’s appeal from the district court’s ruling and held
that “double jeopardy precludes retrial when the district
court has ruled in favor of the defendant on facts going to
the merits of the case if these facts were adduced at an
evidentiary hearing.” 492 F.2d at 127. However, the Su-
preme Court vacated the decision in Lewis, — U.S. —, 95
S.Ct. 1671, 44 L.Ed.2d 97 (1975), and remanded the case
for consideration in light of the Court’s decision in Serfass
v. United States, 420 U.S. —, 95 S.Ct. 1055, 43 L.Ed.2d
265 (1975). Therefore, the principles enunciated in Serfass
are controlling on this issue.
The Supreme Court in Serfass reiterated the principle
that jeopardy does not attach until the defendant is “ ‘put
to trial before the trier of facts, whether the trier be a
jury or a judge.’ ” 420 U.S. at —, 95 S.Ct. at 1062, quoting
United States v. Jorn, 400 U.S. 470, 479, 91 S.Ct. 547, 554,
27 L.Ed.2d 543 (1971). In Serfass, the district court dis-
missed the indictment after a pretrial evidentiary hearing.
But the defendant had not waived his right to a jury trial,
and jeopardy therefore had not attached as a result of an
evidentiary hearing before the district court. The Supreme
Court noted that “[i]n such circumstances, the District
Court was without power to make any determination re-
garding [the defendant’s] guilt or innocence.” 420 U.S. at
—, 95 S.Ct. at 1063. “Without risk of determination of
guilt, jeopardy does not attach, and neither an appeal nor
further prosecution constitutes double jeopardy.” 420 U.S.
at —, 95 S.Ct. at 1064. Thus, under Serfass, a pretrial
order dismissing an indictment is appealable even when the
dismissal is based on facts and evidence outside the indict-
ment. A defendant is not placed in jeopardy merely by a
A-10
pretrial hearing in the district court, where trial by jury
has not been waived, because the trial court is without
authority to make any determination regarding guilt or
innocence. The decisive inquiry is whether jeopardy had
attached at the time an evidentiary hearing was held, and
not simply whether such a hearing has taken place.
The evidence received here, over Government objec-
tion, was at a hearing under Rule 12(b)(4) on motions to
dismiss the indictment, not on the general issue. Defend-
ants not having waived their rights to a trial by jury with
the consent of the Government, see Fed.R.Crim.P. 23(a),
jeopardy has not yet attached in this case and the Govern-
ment therefore may properly appeal the order dismissing
the indictment.
Il. Sufficiency of the Indictment
An indictment is sufficient if it, first, contains the ele-
ments of the offense charged and fairly informs the de-
fendants of the charge against which they must defend, and
second, enables the defendants adequately to plead an ac-
quittal or conviction in bar of future prosecutions for the
same offense. Russell v. United States, 369 U.S. 749, 763-
764, 82 S.Ct. 1038, 1047, 8 L.Ed.2d 240 (1962) and cases
cited; United States v. Sanchez, 5 Cir., 1975, 508 F.2d 388,
395. Whether the indictment sufficiently alleges a crime is
an issue of law, not of fact. United States v. Miller, 5 Cir.,
1974, 491 F.2d 638, 647, cert. denied, 419 U.S. 970, 95 S.Ct.
236, 42 L.Ed.2d 186; see Fed.R.Crim.P. 12(b)(1). On re-
view of an order dismissing an indictment, the indictment
is to be tested not by the truth of its allegations but “by its
sufficiency to charge an offense,” United States v. Sampson,
371 U.S. 75, 78-79, 83 S.Ct. 173, 175, 9 L.Ed.2d 136 (1962),
since the allegations contained in the indictment must be
taken as true. United States v. National Dairy Products
Corp., 372 U.S. 29, 33 n. 2, 83 S.Ct. 594, 598 n. 2, 9 L.Ed.2d
561 (1963); Boyce Motor Lines v. United States, 342 U.S.
337, 343 n. 16, 72 S.Ct. 329, 332 n. 16, 96 L.Ed. 367 (1952).
A-11
A defendant may not properly challenge an indictment,
sufficient on its face, on the ground that the allegations are
not supported by adequate evidence, for an indictment re-
turned by a legally constituted and unbiased grand jury,
if valid on its face, is enough to call for trial of the charge
on the merits. Costello v. United States, 350 U.S. 359, 363,
76 S.Ct. 406, 409, 100 L.Ed. 397 (1956).
Defendants continue to maintain here, as they did in the
district court, that the indictment is insufficient to allege
an offense against the United States. But they erroneously
predicate this contention on evidence outside of the indict-
ment which they introduced at the hearing on the motions
to dismiss. As we have pointed out above, such evidence is
irrelevant to a determination of whether the indictment
itself is legally sufficient.
Since the evidence in question has no bearing on the
facial validity of the indictment, the district court erred in
considering it when deciding whether the indictment alleged
a criminal offense. Defendants contend that the evidence
conclusively demonstrates that the loan transaction was not
entered into “willfully,” because it shows that defendants
could not have had knowledge that the transaction was pro-
hibited by law at the time it was first made.? Cf. 1 Devitt
& Blackmar, Federal Jury Practice and Instructions §
2The Government, both before the district court and here on
appeal, strongly objected to the district court's consideration of
evidentiary matters contradicting the allegations of the indict-
ment. We believe the objection was well taken. Defendants
lace themselves in a dilemma wpe, a this contention.
or example, defendant Mann argues on one hand that this appeal
should be dismissed on double jeopardy grounds “because the
decision of the trial court rests u evidentiary facts outside
the indictment, which facts would constitute a defense on the
merits at trial.” Brief at p. 5. Subsequently, however, in re-
sponding to the Government's attack on the propriety of the
extensive evidentiary hearing, it is asserted that “[ejvidence was
not offered by Appellees at the Rule 12 hearing for the p
of disproving the well plead allegations of the indictment.” Brief
at p. 41. Defendant Mann’s first version of the hearing is more
accurate.
A-12
16.13; 33 F.R.D. 523, 553 (1964). But the Supreme Court
has specifically held, in reversing a district court’s dis-
missal of an indictment, that willfullness is an “evidentiary
question” that should not be determined in a Rule 12(b)
proceeding. United States v. Knox, 396 U.S. 77, 83 n. 7, 90
S.Ct. 363, 367 n. 7, 24 L.Ed.2d 275 (1969); see Universal
Milk Bottle Service, Inc. v. United States, 6 Cir., 1961, 188
F.2d 959, 962. As the Eighth Circuit has stated, “There is
no authority under Rule 12... to dismiss on the basis of
a sufficiency-of-the-evidence defense which raises factual
questions embraced in the general issue.” United States v.
Brown, 8 Cir., 1973, 481 F.2d 1035, 1041 and cases cited.
The essential elements of a substantive violation of 18
U.S.C. § 656 are (1) that the accused was an officer, diree-
tor, ete. of a bank, (2) that the bank was connected in some
capacity with a national or federally insured bank, (3) that
the accused willfully misapplied the money, funds, ete. of
said bank, and (4) that the accused acted with intent to
injure and defraud said bank. Garrett v. United States, 5
Cir., 1968, 396 F.2d 489, 491, cert. denied, 393 U.S. 952, 89
S.Ct. 374, 21 L.Ed.2d 364; United States v. Fortunato, 2
Cir., 1968, 402 F.2d 79, 82, cert. denied, 394 U.S. 933, 89
S.Ct. 1205, 22 L.Ed.2d 463; United States v. Kernodle,
M.D.N.Car., 1973, 367 F.Supp. 844, 850; United States v.
Vannatta, D.Haw., 1960, 189 F.Supp. 939, 941.° See also
United States v. Bearden, 5 Cir., 1970, 423 F.2d 805, 810-
811, cert. denied, 400 U.S. 836, 91 S.Ct. 73, 27 L.Ed.2d 68
(indictment under section 656 sufficient if set out in lan-
guage of the statute). Since the indictment alleged a con-
3“Intent to injure or defraud” is an essential element of a Section
656 violation and must be proved. Some cases have suggested,
however, that this need not specifically be alleged because the
allegation of willful misapplication sufficiently imports an intent
to injure or defraud. See irez v. United States, 9 Cir., 1963,
318 F.2d 155, 157-158; Reviser’s Note to 18 U.S.C. § 656. Since
the indictment in this case specifically alleges that the defendants
acted with intent to injure or defraud, we need not decide
whether failing to so allege constitutes a fatal defect in an indict-
ment,
A-13
spiracy to commit all the substantive elements constituting
a misapplication of bank funds under 18 U.S.C. § 656, it
sufficiently alleged a violation of federal criminal statutes.
Other contentions by defendants that the indictment is
insufficient are without merit. It is not necessary for the
Government to allege that the misapplication was without
the knowledge and consent of the First National Bank of
Waco or its board of directors, since such consent is a
matter of defense. United States v. Klock, 2 Cir., 1954, 210
F.2d 217, 220 (Frank, J.) ; Mulloney v. United States, 1 Cir.,
1935, 79 F.2d 566, 581, cert denied, 296 U.S. 658, 56 S.Ct.
383, 80 L.Ed. 468. It is not necessary for the Government
to allege or prove that the bank actually suffered any loss
as a result of defendants’ actions. United States v. Rickert,
5 Cir., 1972, 459 F.2d 352, 354; United States v. Acree, 10
Cir., 1972, 466 F.2d 1114, 1118, cert denied, 410 U.S. 913, 93
S.Ct. 962, 35 L.Ed.2d 278 (1973); United States v. For-
tunato, 2 Cir., 1968, 402 F.2d 79, 81, cert denied, 394 U.S.
933, 89 S.Ct. 1205, 22 L.Ed.2d 463. Nor is it necessary for
the Government to allege in the indictment that the bank’s
funds were converted to the use of the defendants or others,
for it is not necessary to set forth the means by which the
offense was committed. United States v. Fortunato, supra,
402 F.2d at 82; United States v. Moraites, 3 Cir., 1972, 456
F.2d 435, 440-441, cert. denied, 409 U.S. 891, 93 S.Ct. 109,
34 L.Ed.2d 148. Though it was not necessary to allege con-
version, the indictment does allege that the monies and
funds of the First National Bank of Waco were “converted
to the use, benefit and advantage of the defendant, Robert
A. Mann,” and thoroughly details how the conversion was
accomplished. Conversion is sufficiently alleged in this
indictment, though it was not necessary that the indictment
do so. Since the term “misapplied” has acquired its own
technical meaning, alleging misapplication is sufficient to
charge an individual with a crime, see United States v.
Wilson, 5 Cir., 1974, 500 F.2d 715, 720; United States v.
Moraites, supra, 456 F.2d at 440-441 & n. 9; United
{*
A-14
States v. Meyer, 5 Cir., 1959, 266 F.2d 747, 754, cert. denied,
361 U.S. 875, 80 S.Ct. 138, 4 L.Ed.2d 113, and an indictment
alleging the misapplication of funds is not unconstitution-
ally vague. See, e. g., United States v. Wilson, supra, 500
F.2d at 720; United States v. Cooper, 10 Cir., 1972, 464 F.2d
648, 651, cert. denied, 409 U.S. 1107, 93 S.Ct. 902, 34 L.Ed.2d
688 (1973); United States v. Fortunato, supra, 402 F.2d at
82.
We are in agreement, therefore, with the recent decision
of the Tenth Circuit which held that an indictment alleging
the use of an interbank deposit as a compensating balance
for a loan at a preferential rate to an official of the deposit-
ing bank alleges an offense in violation of 18 U.S.C. § 656.
United States v. Brookshire, 10 Cir., 1975, 514 F.2d 786
[1975].4 Since the indictment in the present case alleged
a conspiracy to misapply bank funds in order to receive a
preferential interest rate, the indictment sufficiently alleges
an offense.
IV. Dismissal of the Indictment on Constitutional Grounds
Defendants raise numerous challenges to the application
of the criminal statute to them under the facts of the case.
The first contention that prosecution is barred by the ex
post facto clause of the Constitution is without merit. It
is settled that the ex post facto clause is applicable to a law
which “makes an action done before the passing of the law,
and which was innocent when done, criminal; and punishes
such action” or one which “aggravates a crime, or makes
it greater than it was, when committed.” Calder v. Bull, 3
4 Defendants seeks to distinguish the Brookshire case chiefly on the
basis that the compensating balance agreement in question in
that case was entered into after the issuance of Circular 31 (see
infra). But, as we have stated, the presence or absence of Cir-
cular 31 in this case is irrelevant to issue whether the indict-
ment alleges an offense. Moreover, even assuming that Circular
31 and its date of issuance, October 22, 1970, is significant, the
Government alleges (and it must be accepted as true) that
the loan in question was renewed on several occasions after the
issuance of Circular 31.
A-15
Dall. (3 U.S.) 386, 390, 1 L.Ed. 648 (1798). The misapplica-
tion statute is an old statutory prohibition, enacted in its
present form in 1948, see 62 Stat. 729, but having ante-
eedents going back into the 19th Century. See Rev. Stat.
5209, p. 1007 (1873-74); United States v. Britton, 107 US.
655, 2 S.Ct. 512, 27 L.Ed. 520 (1883). Inasmuch as the
statute and its penalty long predated the present prosecu-
tion, the indictment is not prohibited by the ex post facto
clause.
Defendants also argue, however, that this prosecution is
prohibited because it constitutes an ex post facto applica-
tion of criminal sanctions and is an unlawful retroactive
application of government policy. They contend that there
had been no prosecutions of the present nature or specific
warning that the conduct under scrutiny in this case was
deemed to be criminal prior to the issuance of Banking
Circular No. 31 in 1970, by the Comptroller of the Currency,
and that the loan agreement in question was consummated
prior to the issuance of Circular 31. Circular 31 was sent
to the presidents of all national banks on October 22, 1970,
at the request of the Justice Department, some ten months
after the consummation of the Mann-Bank of the Southwest
loan on December 12, 1969. It advised the bank presidents
that although there were no cases “at the present time”
construing the use of compensating balances to obtain a
preferential rate of interest to be a misapplication of funds
under the criminal statutes, some such situations might
warrant prosecution action. Additionally, defendants point
to a March 21, 1973, letter from Comptroller of the Cur-
rency Camp to Assistant Attorney General Petersen in
which the Comptroller stated, “It does not appear either
possible or fair to charge Mr. Mann or the Bank of the
Southwest or the First National Bank of Waco with a will-
ful violation.” Moreover, Camp stated, “[I]t appears to
me that all parties endeavored to comply in good faith with
all governmental requests made upon them and with the
law and that it would not be equitable to ask for an indict-
|
A-16
ment based on these facts.” Defendants further note that
regular bank examinations subsequent to the issuance of
Circular 31 gave no indication that the loan in question was
considered to be in violation of law. They also point to the
fact that when the Deputy Comptroller of the Currency
questioned the propriety of the compensating balance and
suggested a reduction in the amount of the account, prompt
action was taken to reduce the balance on deposit to an
appropriate level.5 Additionally, defendants refer to a
letter from John C. Keeney, Chief of the Fraud Section of
the Department of Justice, to United States Attorney
Anthony Farris dated May 4, 1971, in which Keeney stated
in part, “Only in an exceptionaly aggravated situation
occurring before the cut-off date involving substantial loss
and where the defense of common practice might be over-
come, should prosecution under any theory be considered.”
5The letter to the First National Bank of Waco by
Comptroller of the Currency Gwin is viewed in a different light
by the Government. The letter was dated January 25, 1972, one
ear and three months after the issuance of Circular 31. Gwin’s
etter states that the Waco Bank’s compensating balance with
Bank of the Southwest “appears to greatly exceed your bank’s
legitimate needs.” The letter notes that the compensating balance
increased some 1,600%, from about $250,000 to $4,000,000, and
states that this “marked increase . . . coincided with the Bank of
the Southwest’s grant of a $6,900,000 3% interest rate loan to
Robert A. Mann, Chairman of your board.” The Government
contends this letter indicates not ~~ that the compensating
bulance was not justified by legitimate business reasons, but also
that the arrangement continued for some time after the issuance
of Circular 31.
6 Keeney’s letter also states:
Although we are satisfied that, in some instances, this practice
clearly evinces a misuse of the funds and credits of a bank,
it is believed that the prevalence of the practice and the failure
of the regulatory agencies to curtail the activity, will make it
difficult to a a prosecution on conduct occurring before
the above dates [the dates on which the Justice Department's
oes disseminated to federally supervised and insured
anks. }.
The letter further states that the fraud Section of the Depart-
ment of Justice should be consulted before considering any
prosecution. The Fraud Section ultimately approved the present
prosecution.
A-17
In Raley v. Ohio, 360 U.S. 423, 79, S.Ct. 1257, 3 L.Ed.2d
1344 (1959), the Court held that a citizen could not be con-
victed “for exercising a privilege which the State clearly
had told him was available to him” or if the government
conduct constitutes “active misleading” of a person in order
to prosecute him. Jd. at 438, 79 S.Ct. at 1266. The Court
reiterated the policy of proscribing certain types of prose-
cutions in United States v. Laub, 385 U.S. 475, 87 S.Ct. 574,
17 L.Ed.2d 526 (1967), where, in affirming the dismissal of
an indictment, the Court said, “Ordinarily, citizens may not
be punished for actions undertaken in good faith reliance
upon authoritative assurance that punishment will not
attach.” Id. at 487, 87 S.Ct. at 581. The present case, how-
ever, differs from the situation in Raley and Laub. Only
an allegedly widespread practice of entering into prefer-
ential loans of the kind involved here, together with an
absence of prior prosecutions, can be said to require dis-
missal of the indictment under the Raley-Laub rationale.
But the Government has never approved the making of
loans under the circumstances here, nor has it previously
vouched for the propriety of such transactions. However,
governmental silence is not “affirmative assurance that pun-
ishment will not attach” and a mere absence of prior prose-
cutions does not constitute “active misleading,” and the
decisions in Raley and Laub are thus not applicable to the
circumstances in this case. As the Tenth Circuit said of the
compensating balance practice in United States v. Brook-
shire, supra, “If, as defendant(s] say, this practice is the
usual way in which bankers do business, those who engage
in it must suffer the penalty which the law constitutionally
provides.” 514 F.2d at 790.’
7 Defendants and the district court relied heavily on United States
v. Insco, 5 Cir., 1974, 496 F.2d 204, in support of the contention
that the prosecution in this case was an unlawful retroactive
application of government policy. In Insco, this Court reversed
the conviction of an unsuccessful candidate for federal office for
failing to place an attribution clause on bumper stickers dis-
tributed by him, in violation of 18 U.S.C. § 612. Three factors
led the Court to this decision: (1) silence in the legislative
A-18
Defendants next contend that the indictment should be
dismissed because they were unfairly singled out for prose-
cution. They assert that the compensating balance practice
is widespread, and that prosecuting the defendants herein
but not others who have engaged in similar activities con-
stitutes selective prosecution which deprives defendants of
equal protection of the law. It is the prerogative of the
executive to initiate criminal proceedings, see United States
v. Cox, 5 Cir., 1965, 342 F.2d 167 (en banc), cert. denied,
381 U.S. 935, 85 S.Ct. 1767, 14 L.Ed.2d 700; United States v.
history of the statute made it unclear whether Congress intended
to encompass bumper stickers in the attribution clause require-
ment, (2) there had been a “universal practice” among candidates
of not ing such clauses to bumper stickers, and (3) the case
was the first such prosecution ever brought by the Justice Depart-
ment. 496 F.2d at 208. We reversed Insco’s conviction because
he had been “lulled into the reasonable impression” that his ac-
tions were not criminal. Id. at 209.
Defendants argued that the same reasoning is applicable here.
But it is not, for a number of important reasons. First, the finding
of a “universal practice” to which Insco’s conduct conformed was
made after the presentation of evidence by both sides at a trial
on the merits before a district judge. Here, only the defense has
offered evidence, and that at a pretrial hearing on motions to
dismiss the indictment. The Government must be given an op-
rtunity to refute this evidence or to establish that, at the least,
efendants’ conduct amounted to “reckless disregard of the
interest of a bank... .” United States v. Wilson, supra, 500 F.2d
at 720. Additionally, the defendant’s total lack of notice was a
critical aspect of the decision in Insco. The indictment herein,
however, alleges that the loan transaction in question was re-
newed after the issuance of Circular 31, which provided notice
of the possible criminal jeopardy of such transactions. Most
ye however, is the fact that the Court’s action in Insco
took place after trial, and not before. The decision m Insco is
authority only for the proposition that, under the facts of that
case, it was improper to convict Insco. The Court’s opinion does
not relate to the issue in this case, which is whether the Govern-
ment may try the defendants. This distinction is also applicable
to Bouie v. City of Columbia, 378 U.S. 347, 84 S.Ct. 1967, 12
L.E.2d 894 (1964), relied on by defendants. Whatever the merits
of an Insco defense under the facts of this case, defendants will
have an opportunity to raise it at trial. Cf. United States v.
Pennsylvania Industrial Chemical Corp., 411 U.S. 655, 674-675,
93 S.Ct. 1804, 1816-1817, 36 L.Ed.2d 567 (1973); United States
v. Murdock, 290 U.S. 389, 395-396, 54 S.Ct. 223, 225-296 78
L.Ed. 381 (1933).
A-19
Raven, 5 Cir., 1974, 500 F.2d 728, 733 & n. 14, cert. denied,
419 U.S. 1124, 95 S.Ct. 809, 42 L.Ed.2d 824 (1975); United
States v. Ream, 5 Cir., 1974, 491 F.2d 1243, 1246, and at this
pretrial stage of the present case we hold that “the courts
are not to interfere with the free exercise of the discretion-
ary powers of the attorneys of the United States in their
control over criminal prosecutions.” United States v. Coz,
supra, at 171. In Newman v. United States, 1967, 127 U.S.
App. D.C. 263, 382 F.2d 479, the court held that the decision
to prosecute one person rather than another is not review-
able, and that it is not the function of the judiciary to
review the exercise of executive discretion in this regard.
Id. at 482 (Burger, J.)
Moreover, this Court held in United States v. Raven,
supra, a case in which a similar defense was raised, that
Raven’s argument that his conviction should be set aside
because he was singled out as the first subject of a criminal
prosecution, despite the presence of numerous other viola-
tions of the same criminal statutes by others, was insuffi-
cient of itself to require reversal. 500 F.2d at 733.
Defendants’ contention that the prosecution here is in bad
faith because of selectivity must fall in the fact of these
authorities and of the undisputed information furnished by
the United States relative to the numerous conferences
afforded defendants and their counsel at the highest levels
of the Attorney General’s office prior to presentation of the
matter to the Grand Jury.
Defendants further assert that this prosecution contra-
venes the public policy of the United States by attempting
to regulate private business through criminal prosecutions.
It is not for the courts to decide whether a criminal prose-
eution contravenes some vaguely defined “public policy.”
Indeed, it has been stated that “public policy favors the
unencumbered enforcement of criminal laws... .” United
States v. St. Regis Paper Co., 2 Cir., 1966, 355 F.2d 688,
693. If an indictment sufficiently alleges a violation of the
A-20
laws of the United States, and the prosecution of that
indictment is not precluded on constitutional grounds, cf.
United States v. Laub, supra; Raley v. Ohio, supra, the
courts may not dismiss an indictment on grounds of public
policy.
Finally, defendants allege that they are denied due pro-
cess by being subjected to prosecution in this case. Many
of the arguments in support of this contention are not
properly before us at this stage of the case. Defendants’
argument is, in short, that they are innocent and therefore
should not be prosecuted. But guilt or innocence is a deci-
sion which may properly be reached only after trial on the
merits and not before. Cf. United States v. Brown, 8 Cir.,
1973, 481 F.2d 1035, 1041. The indictment was therefore
improvidently dismissed and must be reinstated. We
emphasize that in reversing the district court and remand-
ing the case for further proceedings, nothing we have said
in this opinion is to be construed as intimating any view
whatever as to the guilt or innocence of the defendants or
as to the case’s disposition at trial. We hold only that a
Grand Jury having sufficiently alleged in an indictment that
defendants conspired to commit a criminal act, and ihe
prosecution not being constitutionally improper, the Gov-
ernment must be given an opportunity to prove its case
before the trier of fact.
Reversed.
A-21
United States Court of Appeals
For THE Firtu Circuit
Octoser Term, 1974
No. 74-2983
D. C. Docket No. CR-73-H-268
Unitep States or AMERICA,
Plaintiff-Appellant,
Vv.
Rosert A. Mann AND Bank oF THE SOUTHWEST,
NaTIONAL ASSOCIATION,
Defendants-A ppellees.
APPEAL FROM THE
UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF TEXAS
Before
Gisson* THORNBERRY AND AINSWORTH
Circuit Judges.
JUDGMENT
This cause came on to be heard on the transcript of the
record from the United States District Court for the South-
ern District of Texas, and was argued by counsel;
On ConsmperaTion Wuereor, It is now here ordered and
adjudged by this Court that the judgment of the said Dis-
trict Court in this cause be, and the same is hereby, re-
versed.
August 7, 1975
Issued as Mandate:
* Of the Eighth Circuit, sitting by designation.
B-1
APPENDIX B
Memorandum and Order of the District Court
United States District Court
SouTHERN District or Texas
Hovuston Drvision
Cr. No. 73-H-268
Unrrep StTaTEs or AMERICA
vs.
Rosert A. Mann, AND
Bank OF THE SOUTHWEST,
NaTIONAL ASSOCIATION,
Houston, Texas
MEMORANDUM AND ORDER
Based upon the evidence that is not in dispute, and those
facts which have been stipulated, and the matters of which
the Court can take judicial notice, the Court is of the
opinion that the indictment must be dismissed for the
following reasons and none other.
Firstly, the Defendants have been denied due process
of law.
The Defendants have been denied equal protection of
the law.
The indictment fails to state an offense on its face.
The indictment is too vague and indefinite to sustain a
prosecution.
18 U.S.C. See. 656, as applied in this case, is also too
vague and indefinite to sustain a criminal] prosecution.
This prosecution is precluded because it violates the
ex post facto clause of Section Nine of Article One of the
United States Constitution.
B-2
The indictment should be dismissed because it is an
unlawful retroactive application of government policy as
it affects this criminnal prosecution.
Lastly, the indictment must be dismissed because it
is against the public policy of the United States to regu-
late private business by criminal prosecution as was done
in this case. The Court is relying upon the United States
of America v. Jack P. Ensco, No. 73-3990, Fifth Circuit,
June 21, 1974.
The Court accepts the Defendants’ theory of the law as
it applies to the above reasons for dismissing the indict.
ment.
For these reasons and for no others, except those stated
above, the Court dismisses the indictment.
This is a FINAL JUDGMENT.
Sicnep this 23rd day of July, 1974, at Houston, Texas.
(Signed) WOODROW SEALS
United States District Judge
C-1
APPENDIX C
Constitutional Provisions, Statutes and
Regulations Involved
(1) Constitutional Provisions
Constitution of the United States, Amendment V
No person shall be held to answer for a capital, or
otherwise infamous crime, unless on a presentment or
indictment of a Grand Jury, except in cases arising
in the land or naval forces, or in the Militia, when in
actual service in time of War or public danger; nor
shall any person be subject for the same offence to be
twice put in jeopardy of life or limb; nor shall be com-
pelled in any criminal case to be a witness against him-
self, nor be deprived of life, liberty, or property, with-
out due process of law; nor shall private property be
taken for public use, without just compensation.
(2) Statutes
12 U.S.C. § 371a — Payment of interest on demand deposits
No member bank shall, directly or indirectly, by any
device whatsoever, pay any interest on any deposit
which is payable on demand: Provided, That nothing
herein contained shall be construed as prohibiting the
payment of interest in accordance with the terms of any
certificate of deposit or other contract entered into in
good faith which is in force on the date on which the
bank becomes subject to the provisions of this section;
but no such certificate of deposit or other contract shall
be renewed or extended unless it shall be modified to
conform to this section, and every member bank shall
take such action as may be necessary to conform to this
section as soon as possible consistently with its con-
tractual obligations: Provided further, That this sec-
tion shall not apply to any deposit of such bank which
is payable only at au office thereof located outside of
SE TE nee EEE ee
C-2 | C-.3
the States of the United States and the District of 18 U.S.C. § 656 — Theft, embezzlement, or misapplication by
bank officer or employee
Columbia: Provided further, That until the expiration
of two years after August 23, 1935, this section shall
not apply (1) to any deposit made by a savings bank
as defined in section 264 of this title, or by a mutual
savings bank, or (2) to any deposit of public funds
made by or on behalf of any State, county, school dis-
trict, or other subdivision or municipality, or to any
deposit of trust funds if the payment of interest with
respect to such deposit of public funds or of trust funds
is required by State law. So much of existing law as
requires the payment of interest with respect to any
funds deposited by the United States, by any Terri-
tory, District, or possession thereof (including the
Phillipine Islands), or by any public instrumentality,
agency, or officer of the foregoing, as is inconsistent
with provisions of this section and sections 371b, 374,
374a, 461, 462, 462a—1, 462b to 466 of this title is here-
by repealed. Dec. 23, 1913, c. 6, § 19 (par.), as added
June 16, 1933, ec. 89, § 11(b), 48 Stat. 181; and amended
Aug. 23, 1935, c. 614, § 324(c), 49 Stat. 714.
18 U.S.C. § 371 — Conspiracy to commit offense or to defraud
United States
If two or more persons conspire either to commit any
offense against the United States, or to defraud the
United States, or any agency thereof in any manner or
for any purpose, and one or more of such persons do
any act to effect the object of the conspiracy, each shall
be fined not more than $10,000 or imprisoned not more
than five years, or both.
If, however, the offense, the commission of which is
the object of the conspiracy, is a misdemeanor only, the
punishment for such conspiracy shall not exceed the
maximum punishment provided for such misdemeanor.
June 25, 1948, ¢.645, 62 Stat. 701.
a= meese Ween ---
——
Whoever, being an officer, director, agent or employee
of, or connected in any capacity with any Federal
heserve bank, member bank, national bank or insured
bank, or a receiver of a national bank, or any agent or
employee of the receiver, or a Federal Reserve Agent,
or an agent or employee of a Federal Reserve Agent
or of the Board of Governors of the Federal Reserve
System, embezzles, abstracts, purloins or willfully mis-
applies any of the moneys, funds or credits of such
bank, or to the custody or care of any such agent, offi-
cer, director, employee or receiver, shall be fined not
more than $5,000 or imprisoned not more than five
years, or both; but if the amount embezzled, abstracted,
purloined or misapplied does not exceed $100, he shall
be fined not more than $1,000 or imprisoned not more
than one year, or both.
As used in this section, the term “national bank” is
synonymous with “national banking associaticn”;
“member bank” means and includes any national bank,
state bank, or bank and trust company which has
become a member of one of the Federal Reserve banks;
and “insured bank” includes any bank, banking asso-
ciation, trust company, savings bank, or other banking
institution, the deposits of which are insured by the
Federal Deposit Insurance Corporation. June 25, 1948,
ce. 645, 62 Stat. 729.
(3) Federal Rules of Criminal Procedure
Rule 12. Pleadings and Motions before Trial; Defense and
Objections
(a) Pleadings and Motions. Pleadings in crim-
inal proceedings shall be the indictment and the infor-
mation, and the pleas of not guilty, guilty and nolo
contendere. All other pleas, and demurrers and
motions to quash are abolished, and defenses and objec-
wn |
CA C-5
tions raised before trial which heretofore could have tion or an act of Congress. All other issues of fact
been raised by one or more of them shall be raised only : shall be determined by the court.
by motion to dismiss or to grant appropriate relief, as
provided in these rules. )
(b) The Motion Raising Defenses and 5
Objections.
(1) Defenses and Objections Which May Be
Raised. Any defense or objection which is capable
of determination without the trial of the general
issue may be raised before trial by motion.
(2) Defenses and Objections Which Must Be
Raised. Defenses and objections based on defects
in the institution of the prosecution or in the indict-
ment or information other than that it fails to show
jurisdiction in the court or to charge an offense
may be raised only by motion before trial. The
motion shall include all such defenses and objec-
tions then available to the defendant. Failure to
present any such defense or objection as herein
provided constitutes a waiver thereof, but the court
for cause shown may grant relief from the waiver.
Lack of jurisdiction or the failure of the indict-
ment or information to charge an offense shall be
noticed by the court at any time during the pen-
dency of the proceeding.
(3) Time of Making Motion. The motion shall
be made before the plea is entered, but the court
may permit it to be made within a reasonable time
thereafter.
nw serait 4 one
caPetnsnn
(4) Hearing on Motion. A motion before trial
raising defenses or objections shall be determined
before trial unless the court orders that it be defer-
red for determination at the trial of the general
issue. An issue of fact shall be tried by a jury
if a jury trial is required under the Constitu-
C-6
(4) Regulations or Directives
THE ADMINISTRATOR OF NATIONAL BANKS
WASHINGTON, D.C. 20220
Banking Circular No.3]
October 22, 1970
TO THE PRESIDENTS OF ALL NATIONAL BANKS
SUBJECT: Use of Interbank Deposits as Compensating Balances for
Loans to Individuals Connected with Depositing Bank
We have been requested by the Assistant Attorney Ceneral in charge
of the Criminal Division of the Department of Justice to communicate the
following views with respec: to the above subject:
“Reference is made to the conversations which representatives of
the Criminal Division have had with you and members of your staff con-
cerning the practice of bank officials utilizing the correspondent
accounts of their banks for the purpose of compensating lending banks
for loans granted to these officials. By using these non-interest
bearing correspondent accounts in this manner, some borrowing officials
have been able to obtain loans at preferential rates and to circumvent
other statutes and administrative regulations promulgated for the pro-
tection of Federally regulated or insured banks. Since the borrover
maintains these balances as a condition of the loan, he is able to
utilize the funds and credits of his bank for his own personal benefit.
Investigation into this area disclosed that this practice is fairly
widespread, particularly in certain areas of the country, both in the
initial acquisition of a bank and at subsequent times. There are no
cases, at the present time, construing this practice as «a misapplication
under the criminal statutes. We believe, however, that where the facts
demonstrate a clear detriment to the bank and a concositant benefit to
its officers this activity would, at a minimum, constitute a breach of
the fiduciary duty owed by the officials to the bank and wight ina
certain situations warrant prosecutive action.
In light of the foregoing, your office, together with the Federal
Deposit Insurance Corporation, the Feders =
Federal Home Loan Bank Board, may wish Coben
industry of our view that the above pf
of Federal criminal statutes.”
SF totes ae
hate ee <li elie ke ane ns + -
won Al Son
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D-1
APPENDIX D
Orders Issued by the Board of Governors,
Federal Reserve System
LOCUST GROVE BANSHARES
INCORPORATED,
LOCUST GROVE, OKLAHOMA
ORDER APPROVING FORMATION OF BANK
HOLDING COMPANY*
Locust Grove Banshares, Incorporated, Locust Grove,
Oklahoma, has applied for the Board’s approval under
§3(a)(1) of the Bank Holding Company Act (12 U.S.C
1842 (a)(1)) of formation of a bank holding company
through acquisition of 80 per cent of the voting shares of
Bank of Locust Grove, Locust Grove, Oklahoma (“Bank”).
Notice of the application, affording opportunity for in-
terested persons to submit comments and views, has been
given in accordance with § 3(b) of the Act. The time for
filing comments and views has expired, and the Board has
considered the application and all comments received in
light of the factors set forth in § 3(¢) of the Act (12 U.S.C.
1842(c)).
Applicant, a non-operating company with no subsidiaries,
was organized for the purpose of becoming a bank holding
company through the acquisition of Bank ($3.1 million in
deposits).! Bank is the only bank in Locust Grove (popu-
lation of slightly more than 1,000), located in northeastern
Oklahoma, and is the fourth largest of five banks in Mayes
County, the relevant banking market. Bank controls ap-
proximately 7 per cent of the total commercial bank de-
posits in the market. Upon acquisition of Bank, Applicant
would control the 367th ranking bank in Oklahoma, holding
04 per cent of the total deposits in commercial banks in
* 60 Federal Reserve Builetin, October, 1974 at 729.
1 All banking data are as of June 30, 1973.
D-2
the State. Since the purpose of the proposed transaction
is to effect a transfer of the ownership of Bank from indi-
viduals to corporate ownership with no change in Bank’s
present management or operation, consummation of the
proposal herein would not eliminate existing or potential
competition, nor have an adverse effect on other area
banks.
A principal of Applicant is also a shareholder, officer,
and/or director in two other banks: The Bank of Chelsea,
Chelsea, Oklahoma ($5 million in deposits), and First Na-
tional Bank of Fairlane, Fairlane, Oklahoma ($1 million
in deposits). Each of the banks is located over 40 miles
distant from Bank and each operates in separate and dis-
tinct banking markets from the Mayes County market.
From the facts of record, it is the Board’s judgment that
competitive considerations are consistent with approval of
the application.
The financial and managerial resources and future pros-
pects of Applicant, which are dependent upon those of
Bank, are considered to be satisfactory. Accordingly, finan-
cial and managerial considerations are consistent with ap-
proval of the application. As indicated above, the proposed
acquisition represents a change in the form of ownership of
Bank, and there are no significant proposed changes in the
operation or services of Bank. Considerations relating to
the convenience and needs of the community to be served
are consistent with approval. It is the Board’s judgment
that the acquisition would be in the public interest and that
the application should be approved.
On the basis of the record, the application is approved
for the reasons summarized above. The transaction shall
not be made (a) before the thirtieth calendar day follow-
ing the effective date of this Order, or (b) later than three
months after the effective date of this Order, unless such
period is extended for good cause by the Board, or by the
- .
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D-3
Federal Reserve Bank of Kansas City pursuant to dele-
gated authority.
By order of the Board of Governors effective September
12, 1974,
Voting for this action: Governors Sheehan, Bucher, Holland, and
Wallich. Voting against this action: Vice Chairman Mitchell and
Governor Brimmer. Absent and not voting: Chairman Burns.
Board action taken while Governor Brimmer was a Board
Member.
(Signed) THeropore E. Auuison,
[SEAL } Secretary of the Board.
DissENTING STATEMENT OF
Governors MITCHELL AND BRIMMER
We would deny this application for the reason that we
believe it is not in the public interest to sanction an ar-
rangement whereby owners of 80 per cent of the shares of
Bank secured a loan to purchase such shares at a prefer-
ential rate (5 per cent) on the implicit condition that the
lending bank will profit from the transaction by receiving
a compensating balance as part of Bank’s correspondent
account. Thus, Bank’s resources are being used to subsidize
the personal interests of shareholders owning 80 per cent
of Bank.
In our view, if bank stock loans are to be made, they
should be made on the same basis as stock collateral loans
in general. We are concerned that such preferential loans
could result in conflict of interest or breach of fiduciary
duty on the part of the borrowing officer or director if the
reduction in the interest rate is conditioned on the mainte-
nance of correspondent balances with the lending bank.
Accordingly, in our judgment, the Board should not ap-
prove this holding company application and thereby sanc-
tion the use of such preferential loans. :
SS
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A further concern of ours, though one which does not
appear to be present in the facts of record involved in this
case, is that the making of bank stock loans at less than
the prevailing interest rate may be a means whereby a
lending bank, without the necessity of securing prior Board
approval, acquires indirect control of the borrowing bank’s
shares which are pledged as collateral.
For the foregoing reasons, we would deny the appli-
cation.
FIRSTBANK HOLDING COMPANY,
MARIETTA, OKLAHOMA
ORDER APPROVING FORMATION OF BANK
HOLDING COMPANY*
Firstbank Holding Company, Marietta, Oklahoma, has
applied for the Board’s approval under § 3(a)(1) of the
Bank Holding Company Act (12 U.S.C. 1842(a)(1)) of
formation of a bank holding company through acquisition
of 80 per cent or more of the voting shares of Firstbank
of Marietta, Marietta, Oklahoma (“Bank”).
Notice of the application, affording opportunity for
interested persons to submit comments and views, has
been given in accordance with § 3(b) of the Act. The time
for filing comments and views has expired, and the Board
has considered the application and all comments received
in light of the factors set forth in §3(¢) of the Act (12
U.S.C. 1842(c)).
Applicant is a nonoperating corporation organized for
the purpose of becoming a bank holding company through
acquisition of Bank, deposits of $10 million, representing
0.1 of 1 per cent of the total commercial bank deposits in
Oklahoma.' Bank is the only bank located in the Love
County banking market, which has a population of appro-
* 61 Federal Reserve Bulletin, February, 1975 at 104.
1 All banking data are as of December 31, 1973.
6 6 nee os tea i
_ . -
——
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ximately 5,600 persons. The proposal represents a corpo-
rate reorganization with no change in the management
of Bank. Since Applicant has no present operations, con-
summation of the proposal would have no effect on existing
or potential competition.
Accordingly, the Board concludes that competitive con-
siderations are consistent with approval of the application.
The financial condition and managerial resources of
Applicant are dependent upon these same conditions as
they exist in Bank. Bank’s financial condition and manage-
ment are satisfactory and, based upon Bank’s past earn-
ings, the projected dividends from Bank appear sufficient
to provide the necessary funds for retirement of the debt
that Applicant would incur as a result of this proposal
without placing a burden on Bank’s capital position. Pros-
pects for Applicant and Bank appear favorable. In addi-
tion, the Board notes that Applicant will be assuming a
preferential interest rate on certain bank stock loans made
to Bank’s major shareholders. Although the Board had
expressed some concern about such loans in the past, there
is no evidence in the record indicating that the loans in
this case have resulted in any abuses to Bank or its
minority shareholders. Accordingly, considerations relat-
ing to the conveniences and needs of the communities to
be served are consistent with approval of the application.
It is the Board’s judgment that the proposed transaction
would be in the public interest and that the application
should be approved.
On the basis of the record, the application is approved
for the reasons summarized above. The transaction shall
not be consummated (a) before the thirtieth calendar day
following the effective date of this Order or (b) later than
three months after the effective date of this Order, unless
such period is extended for good cause by the Board, or
by the Federal Reserve Bank of Kansas City pursuant
to delegated authority.
D-6
By order of the Board of Governors, effective January
29, 1975.
Voting for this action: Governors Holland, Wallich, and Cold-
well. Voting against this action: Governors Mitchell and Sheehan.
Absent and not veting: Chairman Burns and Governor Bucher.
(Signed) TxHropore E. Auuison,
[SEAL] Secretary of the Board.
DissENTING STATEMENT OF
Governors MITCHELL AND SHEEHAN
We would deny the application of Firstbank Holding
Company to become a bank holding company through
acquisition of Firstbank of Marietta (“Bank”) based on
our view that the interest rate (7 per cent) on certain
loans that Applicant will assume as a result of this pro-
posal is preferential. The loans in question were made by
Bank’s primary correspondent bank, The Liberty National
Bank and Trust Company of Oklahoma City, to three
principals of Applicant, each of whom pledged their re-
spective shares cf Bank’s stock as collateral for the indebt-
edness. Applicant now proposes to acquire approximately
95 percent of the shares of Bank on an even exchange of
one share of Applicant for one share of Bank and to assume
the existing indebtedness on such shares of Applicant’s
principals. We are concerned that preferential interest
rates on bank stock loans may involve conflicts of interests
or a breach of fiduciary duty on the part of the borrowing
official if the favorable interest rate is conditioned upon
the maintenance of correspondent balances with the lending
bank or some other indirect financial advantage to the
lender and particularly if such rates are not available on
an equivalent basis to all shareholders of the borrowing
official’s bank. Accordingly, it is our view that the poten-
tial evils inherent in the granting and receiving of a prefer-
ential interest rate on a bank stock loan indicate that such
loans are not in the public interest.
a. ica
ee ee we
D-7
Another ground for denial is our assessment that the
proposed acquisition debt to be assumed by Applicant is
high in relation to its equity. Applicant is a newly formed
corporation and the earnings of Bank would serve as its
primary source of funds. The large debt servicing require-
ments for the purchase of approximately 95 per cent of
the stock of Bank could place an undue strain on the finan-
cial condition of Bank and impede Bank’s ability to provide
adequate banking services to the community. In our view,
the projected earnings of Applicant (derived from Bank)
do not provide Applicant with the necessary financial
flexibility to meet its annual debt servicing requirements
as well as any unexpected financial needs that might arise
at Bank.
For the foregoing reasons, we do not regard the proposal
as being in the public interest, and we would deny the appli-
cation.
NBC CORPORATION,
ALTUS, OKLAHOMA
ORDER APPROVING FORMATION OF
BANK HOLDING COMPANY*®
NBC Corporation, Altus, Oklahoma, has applied for the
Board’s approval under §3(a)(1) of the Bank Holding
Company Act (12. U.S.C. 1842)(a)(1)) of formation of a
bank holding company through acquisition of more than 80
per cent of the voting shares of The National Bank of Com-
merce, Altus, Oklahoma (“Bank”).
Notice of the application, affording opportunity for inter-
ested persons to submit comments and views, has been given
in accordance with §3(b) of the Act. The time for filing
comments and views has expired, and the Board has con-
sidered the application and all comments received, including
those submitted by the Comptroller of the Currency, in
*61 Federal Reserve Bulletin, February, 1975 at 106.
eS
D-8
light of the factors set forth in § 3(c) of the Act (12 U.S.C.
1842(c)).
Applicant is a recently-organized corporation formed for
the purpose of becoming a bank holding company through
the acquisition of Bank. The proposed transaction essen-
tially involves the transfer of ownership from individuals
to a corporation owned by the same individuals with no
change in Bank’s management or operations. Bank (depos-
its $15.6 million)! is the second largest among six banking
organizations competing in its banking market, and holds
about 28.4 per cent of the market’s total commercial depos-
its. Upon acquisition of Bank, Applicant would control
about 0.2 per cent of total commercial bank deposits in the
State. Applicant’s principal shareholders also control the
First State Bank, Grandfield, Oklahoma; however, that
bank is located 75 miles southeast of Bank in a separate
market area and does not compete with Bank. Since the
subject proposal represents merely a restructuring of exis-
ting ownership interests, its consummation would not elim-
inate any existing competition, nor would it appear to have
any adverse effects on other banks or on the development
of competition in the relevant market. Therefore, com-
petitive considerations are consistent with approval of the
application.
The financial condition and managerial resources of Ap-
plicant and Bank are considered to be generally satisfac-
tory and the prospects of each appear favorable. The
Board notes that the Comptroller of the Currency has
expressed some concern that consummation of this proposal
may result in a burden upon Bank’s earnings. However, on
the basis of the Board’s review of the financial resources
of Bank and Applicant, the Board is of the view that,
although Applicant will incur debt in the acquisition of
Bank, Applicant appears to be able to service the debt
1 Deposit data are as of December 31, 1973.
2The relevant market is approximated by Jackson County.
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7 | 5 ee Mt. Nadiad oni >
a hind oo teas
ee
D-9
without impairing the financial condition of Bank. In addi-
tion, it appears that Applicant will be assuming a preferen-
tial interest rate on certain bank stock loans made to Bank’s
major shareholders. Although the Board has expressed
some concern about such loans in the past, there is no evi-
dence in the record indicating that the loans in this case
have resulted in any abuses to Bank or the minority share-
holders. Considerations relating to the banking factors are
consistent with approval of the application. Although there
will be no immediate change or increase in the services
offered by Bank as a result of the shifting of Bank’s owner-
ship to a corporation, considerations relating to the con-
venience and needs of the communities to be served are con-
sistent with approval of the application. It is the Board’s
judgment that the proposed transaction is consistent with
the public interest and that the application should be
approved.
On the basis of the record, the application is approved
for the reasons summarized above. The transaction shall
not be consummated (a) before the thirtieth calendar day
following the effective date of this Order or (b) later than
three months after the effective date of this Order, unless
such period is extended for good cause by the Board, or by
the Federal Reserve Bank of Kansas City, pursuant to
delegated authority.
By order of the Board of Governors, effective January
23, 1975.
Voting for this action: Chairman Burns and Governors Holland,
Wallich, and Coldwell. Voting against this action: Governors
Mitchell and Sheehan. Absent and not voting: Governor Bucher.
(Signed) THropore E. Auuison,
[sEAL } Secretary of the Board.
— |
D-10
DissENTING STATEMENT OF
Governors MritcHELL AND SHEEHAN
We would deny the application of NBC Corporation to
acquire The National Bank of Commerce (“Bank”) since
we believe that it is not in the public interest to sanction
an arrangement wherein it appears that Bank’s resources
are being used to subsidize the personal interests of the
principal shareholders of Bank. Specifically, the owners of
a majority of the shares of Bank, who will also become the
majority shareholders of Applicant, secured loans from
Liberty National Bank and Trust Company of Oklahoma
City, Bank’s principal correspondent, at a preferential in-
terest rate.
Under this proposal, Applicant will assume the outstand-
ing indebtedness of Bank’s majority shareholders, along
with the preferential interest rate, and Bank will continue
its correspondent relationship with Liberty National. In
our view, such an arrangement could result in a conflict of
interest or breach of fiduciary duty on the part of the bor-
rowing officials if the setting of the preferential interest
rate, by forma! or informal arrangement between the lend-
ing bank and Bank, entails Bank assuming a portion of the
interest costs of its major stockholders. This could be ac-
complished by various means, including maintenance by
Bank of an inflated correspondent balance at the lending
bank, sales by Bank of Federal funds to the lending Bank
at below market rates, or placing of certificates of time de-
posit at belov market rates. On the other hand, if such
arrangements are not entered into between the lending bank
and Bank, the lending bank’s stockholders are placed at an
obvious disadvantage as a result of their management mak-
ing loans well below prevailing rates of interest.
Bank stock loans at competitive rates are appropriate
as short-term credits, or “bridge loans”, while longer term
financing of the take-over is being arranged. However,
when such credit is for an extended period or, as a result
“ ascatittininasa lings,
D-11
of renewals, amounts to permanent financing, the basic
strength of a local or regional banking system can be
weakened. The use of one bank’s depositors’ funds to make
loans which constitute a significant source of another
bank’s capital dilutes one of the major elements of financial
support for the banking system — capital funds which are
wholly external to it.
Finally, we are concerned about the sizable debt that
Applicant will assume under this proposal. In our view, the
debt servicing requirements imposed on Applicant could
place an undue strain on Bank’s financial condition and
thus impair its ability to continue to serve as a viable bank-
ing organization in meeting the needs of its community.
For the foregoing reasons, we would deny the applica-
tion.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.