Petition — HARRIS v. UNITED STATES (Nos. 78-1570, 78-1567, 78-1568, 78-1569)

Ae ee oe

‘Supreme Court, U. 4

|

FILED

APR 13 1979

78-1570 |

» MICHABL RODAK, JR., CLERK i

IN THE

Supreme Court of the United States

October Term, 1978

NO.

JOHN B. HARRIS,

Petitioner,

7,

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

FOURTH CIRCUIT

William D. Caffrey

Nichols, Caffrey, Hill, Evans

and Murrelle

Counsel for Petitioner

Post Office Box 989

Greensboro, North Carolina 27402

SERRE REE CENTERLINE ARIE FER UE RRO MNO RRO AE PNT TEE NOTTS

FRED R. SURFACE & ASSOC. INC., HERITAGE BUILDING, RICHMOND, VA. (804) 643-7789

Opinions Below . « «.s sss »

SOEISEIOCROR 1. «4 & 6 oe 8 ee

Question Presented ......

Applicable Statutes .....

Statement of the Case ....

Reasons for Allowance of Writ

CONTI as) oe le ee KS Se

Certificate of Service ....

Appendix

Opinion of the United States

Court of Appeals for the

POGEGCR Cepeuest « «kee we

Order denying petition for

rehearing by the United

States Court of Appeals for

the Pourth Circuit ...s<

Judgment of the United

States District Court for

the Middle District of

Marth: CALGLIOe . 2 « 4: e & >

Applicable Statutes, Regu-

lations and Constitutional

PEGCEEIES «: « 6 «2 5 0 eo

27

28

CITATIONS

Cases

Borden Kircher v. Hayes,

434 U.S. 357, 54 L.Ed.

2d 604, 98 S.Ct. 663,

reh. den. 435 U.S. 918,

55> &Ba. 24 511, 98 S.Ct.

ee Cee eee a ee gw ew l|CG T

Margolis v. United States,

407 F.2d 7/27, Cert. Den.

396: C.8e 853; Fe Bcc. &3,

ee meee ee ees os kl te OS ee 2 4

United States v. Britton,

i397 U.S. 655, 2 S.Ct. 512,

pg ER ee a

pe Pe E

United States v. Cooper,

S77 F.2a@ LUu?d (6th Cir. 1978) ... 22

United States v. Docherty,

468 F.2d 989 (2nd Cir. 1572). ae Or tone

United States v. Gallagher,

Sve f.a0 Loe2e tora Cir. 1976) ..-. 20,21,

22

United States v. Gens, 493

Pi en ere. Bees. . » « « « 15,16,

37,23,

22

United States v. Hanish, 502

2 Ee Pie vf PS

United States v. Jones, 542

oe © 2 BS yb] > ee eee se

ii

United States v. Perrotta, 533

Feaa aa? (a6t GEE. 2PTT) «+ *

United States v. Pomponio, 517

F.2d 460, Cert. den. 423 U.S.

1015, 96 S.Ct. 488, 46 L.Ed.2d

Dee CARTS a's a we eS

waneey Vv. Stayton 487 F.2d

90 sd oe te _ . _ 7 - °

Statutes

Ee Pe Se ee ae ee me ee

Le Dames 8 Olea: 6 6.4 Cs

13-U.6.0.- 9 Bobs © Soe. 6 leis

a8 U,6.0. 9 897s. 2 ris 2 416 Ss

th ee eS roe ee ee

yi ee ee tS ee ee

Constitution

Fifth Amendment United States

CARE tEOE Ie. Sk see be eS

Sixth Amendment United States

eee See eee Ss 6 8 ae ek

Regulations

12 Code of Federal Regulations

§ 563.9-3. . e . . e a ee ° -

iii

26

24

24

4,10,

C-1l

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1978

No.

JOHN B. HARRIS,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari

To the United States Covrt of Appeals

for the Fourth Circuit

To the Honorable, The Chief Justice

of the United States and the Associate

Justices of the Supreme Court of the

United States:

Petitioner respectfully prays that a

writ of certiorari issue to review the

judgment of the United States Court of

Appeals for the Fourth Circuit affirming

petitioner's conviction and the judgment

of the United States District Court for

the Middle District of North Carolina.

2

OPINIONS BELOW

The opinions of the United States

Court of Appeals for the Fourth Circuit

appear as Appendix A to this petition,

andare unpublished. The judgment of the

United States District Court for the

Middle District of North Carolina appears

as Appendix B to this petition and is

unpublished.

JURISDICTION

The decision sought to be reviewed

was entered by the United States Court

of Appeals for the Fourth Circuit on

January 30, 1979 and denial of the

petition for rehearing was entered on

March 14, 1979. The opinions were not

published anda appear in Appendix A of

this Petition. The jurisdiction of this

Court to review by writ of certiorari

the decision in question is conferred

by Title 28, United States Code, §1254(1).

QUESTIONS PRESENTED

1. Does the prosecutorial threat, or

its execution, of an additional indictment

in order to coerce a change of plea by

a defendant violate the due process

clause of the Fifth Amendment?

Are the due process rights of an

accused including the right to testify

in his own behalf and the right not to

be a witness against himself violated

when a Federal prosecutor uses said

evidence contained in the subsequent

indictment in evidence at the trial of

the original indictment?

3

2. Did the trial court err by refusing

petitioner's request to instruct the jury?

(a) That the mere violation or

attempted violation of a Federal] Home

Loan Bank Board regulation does not.

constitute a "willful misapplication"

pursuant to 18 USC §657;

(b) That the mere making of a loan

to a named borrower for the use and

benefit of third party, sometimes re-

ferred to as "straw" or “accommodation”

loan, does not constitute a "willful

misapplication" pursuant to 18 USC §657

and that for such accommodation loan to

be a “willful misapplication" there must

be an additional showing that either

(1) the savings and loan official

authorizing the loan knew the named

borrower to be a fictitious person or

was wholly unaware that his name was

being used, (2) that official knew the

named debtor was financially incapable

of repaying the loan, or (3) that

official knew the savings and loan had

assured the named borrower that payment

would not be sought from him in the

event of default.

3. Did the trial court err by refusing

petitioner's request to make inquiry of

any potential jurors who indicated during

the voir dire process having read or

heard considerable pretrial publicity,

which petitioner had previously demon-

strated to the trial court was substantial,

inaccurate and highly prejudicial, outside

the presence of the other potential jurors

and thereafter, during the voir dire,

allowing such jurors indicating having

4

read or heard considerable pretrial pub-

licity, to recount the substance of that

publicity and their conclusions there-

from in the presence of all other potential

jurors,

APPLICABLE STATUTES, REGULATIONS AND

CONSTITUTIONAL PROVISIONS

The statutes applicable to this

petition are 18 U.S.C. §371, 656, 657 and

1006 and 12 U.S.C. §1464. The regulation

applicable to this petition is 12 C.F.R.

§563.9-3. The Constitutional provisions

applicable to this petition are Fifth and

Sixth Amendments to the United States

Constitution. Said statutes, regulations

and Constitutional provisions are set

forth in the appendix, except 12 U.S.C. §1464.

STATEMENT OF THE CASE:

On September 6, 1976, petitioner

and four other defendants were variously

charged in eighteen counts of one indict-

ment. In one count, all defendants were

charged under 18 U.S.C. §371 with con-

spiring to commit offenses against the

United States in violation of 18 U.S.C.

§657 and 1006 by misapplying funds of a

Federally insured savings and loan

association and causing false entries

and statements to be made in the records

and reports of that association. Harris

was also charged in thirteen substantive

counts with violation of 18 U.S.C. §657

in three substantive counts with violation

of 18 U.S.C. §1006, said charges all

arising out of the alleged use of

"accommodation borrowers" purportedly to

conceal the diversion of funds to one of

the defendants.

5

Petitioner plead not guilty to all

charges on September 13, 1976. Trial

was subsequently set to begin January

19, 1977.

On December 9, 1976, counsel for

Harris was informed by the United States

Attorney that Mr. Harris was going to

be indicted on January 3, 1977 for mis-

application in the MIC transaction (a

transaction occurring during the period ,

of the alleged conspiracy in this case

and involving the same institution and

the same set of circumstances), but

Mr. Harris' counsel was informed further

that if Harris would plead guilty to

one count in the present indictment, the

prosecutor would not go to the grand jury

on the indictment in regard to MIC.

Mr. Harris declined to plead guilty and

on January 3, 1977, the threatened new

indictment was sought and returned on

MIC.

Trial in the present case commenced

January 19, 1977. During the trial, the

government introduced the evidence re-

aarding the MIC transaction. The jury

revurned a verdict of guilty on all

seventeen counts, the judgment was

affirmed by the Court of Appeals and a

petition for rehearing was denied.

REASONS FOR ALLOWANCE OF THE WRIT

1. The due process rights of the accused

were violated by the abuse of the

Charging power by the prosecutor.

This Court should indicate disapproval

of and bring a halt to the abuse of the

6

charging power of a Federal prosecutor

as demonstrated in this case. Here the

defendant had plead not guilty to a

multi-count indictment and had requested

a jury trial. A trial date had been set.

In an effort to coerce the defendant to

change his plea to guilty to at least

one count, the prosecutor advised the

defendant through counsel that if such

a change of plea was not forthcoming, the

defendant would be indicted on a further

charge arising out of the same set of

circumstances.

That the threat was real is demon-

strated by the fact that the defendant

refused to be coerced and was thereafter

and therefor indicted.

In Bordenkircher v. Hayes, 434 U.S.

357, 54 L.Ed. 2d 604, 98 S.Ct. 663, rehden

435 U.S. 918, 55 L.Ed. 24 511, 98 S.Ct.

1477 (1978), involving a similar question,

this Court delineated two situations:

one constitutionally impermissible -- one

permissible. The permissible conduct was

conduct:

"... which no more than openly

presented the defendant with the

unpleasant alternatives of forgoing

trial or facing charges on which he

was plainly subject to prosecution,

coce” 424 U.6. at 365, 34 L.84. 24

at 612.

In addition to limiting the permissible

conduct to "this case" and "only" to the

course of conduct in the presented case,

this Court clearly felt it constitutional-

ly impermissible conduct

7

"... where the prosecutor without

notice brought an additional and

more serious charge after plea ne-

gotiations relating only to the

original indictment had ended with

the defendant's insistance on ‘pleading

not guilty." 434 U.S. at 360, 54

L.Ed. 2d at 609.

In the presented case, the facts do

not fall within that conduct the Court

accepted as “permissible" and are

demonstrably more akin to that prosecu-

torial conduct stated to be impermissible.

Clearly, the evil sought to be avoided by

this Court is the evil existing in the

presented case.

In the present case, plea negotiations

were not continuing, the defendant had

already plead not guilty and the date

for the jury trial had been set. The

subsequent indictment in this case arose

out of the same set of transactions as the

first indictment. The prosecutor put

into evidence the evidence surrounding

the subsequent indictment as a similar

transaction at the trial in this matter.

The prosecutor's conduct placed Mr. Harris

in an untenable position. If he testified

at his trial, he could be questioned

surrounding the facts and circumstances

of the case involved in the second and

subsequent indictment, thus denying to

Mr. Harris his right not to be a witness

against himself as to the second indict-

ment. If, because of this threat, he

failed to testify, as he in fact did, he

was thus forced to forego his constitu-

tional right to testify in his own behalf

in the present case.

8

This doubled barreled use of the

charging process by a prosecutor to

attempt to coerce a guilty plea in an

earlier indictment and then effectively

to deny a defendant his due process

rights at the trial of the first indict-

ment and at the possible trial of the

second indictment are unacceptable and

should be stopped.

2. (a) In holding that the trial court's

jury charge was without error, the

United States Court of Appeals for the

Fourth Circuit rendered a decision in

conflict with the decision of this

Court 19 U.S. Ve. Bratton, Ly? UiS. 655,

2 BCG. gia, 2! BG. Deu Lees)

holding that a mere violation of

banking (savings and Loan) regula-

tion does not constitute a "willful

misapplication."

Paragraph 8 of COUNT ONE of the Indict-

ment! and the U. S. Attorney's opening

rc

"8, It was a part of said con-

Spiracy that WILLIAM W. EDWARDS, BOBBY

R. ROBERTS and JOHN B. HARRIS would

cause loans to be made at First Federal

Savings and Loan Association, Durham,

North Carolina, to various individuals

and entities for the use of BOBBY R. ROBERTS

for the purpose of circumventing regula-

tions which restrict the total amount of

loans to any one borrower and concealing

from said Association the purpose of

said loans."

9

statement” set forth the central theme

of the entire Eighteen Count Indictment:

that in an attempt to circumvent a

regulation of the Federal Home Loan Bank

Board forbidding lending to one borrower

in excess of a certain percentage of the

savings and loan association's

2

", . . We propose to show [Roberts]

was not able under federal regulations

to borrow any more money from First Fed-

eral Savings and Loan; because there

are regulations prohibiting a savings and

loan or bank -- lending institutions --

from lending in excess of a certain

amount of money to any one borrower or

his corporations, because of the danger

of exposing the association to lending

too much to one person, putting all

their eggs in one basket.

"That in order to circumvent that

regulation at First Federal Savings and

Loan, Mr. Roberts, along with Mr. Edwards

-- who was then President -- Mr. Harris

-- who was then Secretary-Treasurer and

a director -- embarked on a pattern of

bringing in what is known as straw

borrowers.

"That loans would be made in the

names of these straw borrowers, not

intended for their use ... . But loans

made in their names to go to Mr. Roberts

to one, circumvent the regulations pro-

hibiting putting all the eggs in one

basket, and to provide him operating

capital." (Tr 170-1)

10

assets, > Petitioner made accommodation

loans to various named borrowers for the

benefit of a borrower otherwise for-

bidden to borrow more and that these

transactions should be telescoped to

constitute a constructive violation of

that regulation.

For argument, Harris will concede that he

caused the association to make the loans

alleged in the indictment knowing the

borrower had agreed to turn the funds

over to co-defendant Bobby R. Roberts.

However, from the outset of this case,

Petitioner has pointed the Government to

this Court's decision in U.S. v. Britton,

supra, wherein this Court reversed the

misapplication conviction of a bank

president under 18 USC §656, the statutory

twin of 18 USC §657, for purchasing

stock of a bank with bank funds in viola-

tion of a federal banking regulation.

In reversing that conviction, this Court

labelled as mere maladministration the

very activity the Government contends

here constitutes a misapplication:

"If we hold these counts to be

good, then every official act of

an officer, clerk or agent of a

banking association, by which its

funds are applied in a way not

authorized by law, would be

3

See 12 C.F.R. §563.9-3 at Appendix

p. C-ll

ll

punishable under section 5209 (now

18 U.S.C. §656).

"For instance: section 5200 of

the Revised Statute declares that

TThe total liabilities to any

association of any person .... for

money borrowed .... shall at no time

exceed one tenth part of the capital

stock of the association actually

aid in... if the counts under

consideration are sustained, then

every president, director, ... who

has any part in lending money of the

association contrary to the provisions

of these sections, is guilty of a

criminal misapplication of its

funds ....

"We are, therefore, of opinion

that the willful misapplication of

the moneys and funds of the banking

association ...., means something

different from the acts of official

maladministration ...." (Emphasis

added) 27 L.Ed. at 524.

The wisdom of Britton was reaffirmed

by the Second Circuit in U.S. v. Docherty,

468 F.2d 989 (1972) wherein that court

reversed an individual's conviction for

misapplication where he knowingly ob-

tained accommodation loans for the benefit

of a bank official, who by regulation was

proscribed for borrowing directly from

the bank. Speaking for the Court, Judge

Friendly stated:

The Court also stated in U.S. v.

Britton, 107 U.S. at 667, 2 S.Ct.

at 522, that the counts relating

12

to the stock purchase [charged]

“maladministration of the affairs

of the ba: k, rather than criminal

misapplication of its funds" and

that, if the counts were held to

be good, “every official act of

an officer, clerk or agent of a

banking association, by which its

funds are applied in a way not

authorized by law, would be

punishable ...." It would seem to

follow a fortiori that mere know-

ledge that the transactions here

at issue violated a bank rule would

not suffice to support a conviction

for aiding and abetting. Docherty

at 993.

Accordingly, Petitioner requested

the trial court specifically charge that

the existence of a mere violation of a

savings and loan regulation or knowledge

of such violatign does not constitute

misapplication. Instead the trial

court's charge had the opposite effect:

"A willful misapplication is an

unauthorized, unjustifiable, or

wrongful use of the savings and

loan association's monies, funds,

credits, assets, or securities ....

"If you find any of the trans-

actions involved in this case are

tr

The entire misapplication

instruction requested by Petitioner is

at Appendix p. C-6

13

in actual violation of specific

Savings and loan law, then the

fact that the board of directors

consented to the transaction does

not constitute a defense of willful

misapplication." (Transcript 2733,

emphasis added)

Petitioner immediately objected to

the broad and strange phraseology "savings

and loan law" and the absolute criminality

imposed upon the finding of "any ... actual

violation of specific savings and loan

law ..." Petitioner requested. the trial

court explain to the jury that a dis-

tinction is drawn between "laws" and

"regulations" promulgated thereunder,

that during the trial the government had

made reference to various regulations

which were not the same as law and the

specific language of the more pertinent

regulations discussed, and that the jury

could not find willful misapplication

solely upon the showing of a violation

of regulation. The trial court refused

these requests for additional instructions.

Under the instructions given by the

trial court, a juror could easily have

concluded that the showing of the

violation of any regulation was a viola-

tion of a "savings and loan law" and as

such constituted willful misapplication.

Congress did not intend 18 USC §657 to

have such a sweeping effect; instead,

Congress granted the Federal Home Loan

Board civil enforcement powers in 12 USC

§1464 and established elaborate

14

administrative procedures under which

those enforcement powers were to be used.

By its decision in this matter, the Fourth

Circuit has transferred the enforcement

of the Federal Home Loan Bank regulations

from the Board to the Justice Department

contrary to the will of Congress. Now,

as this Court feared in Britton: "every

official act of an officer of a banking

(or savings and loan) association, by

which its funds are applied in a way not

authorized by law (constitutes willful

misapplication)." Britton at 27 L.Ed.

at 524.

(b) In holding that the trial

court's jury charge was without

error, the United States Court

of Appeals for the Fourth Circuit

rendered a decision in conflict

with decisions of the First and

Third Circuit Courts of Appeal

requiring a trial judge to instruct

the jury that the mere making of

loans to a named debtor for the use

of a third party does not constitute

“willful misapplication,” even if

this loan tended to disguise the

true recipients, and that a savings

and loan official authorizing a loan

for such third party benefit must

either (1) know the named debtor to

be a fictitious person or wholly

unaware that his name was being used;

or (2) know the named debtor was

financially incapable of repaying

the foan; and (3) know the savings

and loan had assured the named debtor

that payment would not be sought

from him in default, to constitute

"willful misapplication.”

15

Petitioner does not quarrel with the

basic fact that accommodation loans were

made, but has consistently argued that.

these accommodation loans were almost

identical to those the First Circuit in

U.S. v. Gens, 493 F.2d 216 (1974) con-

cluded were perfectly permissible unless

some showing that they fell within one

of three proscribed categories set

forth in Gens:

"The cases of this type in which

willful misapplication has been

found fall into three general

categories. First, those in

which bank officials knew the named

debtor was either fictitious or

wholly unaware that his name was

being used .... Second, cases in

which bank officials knew the named

debtor was financially incapable of

repaying the loan whose proceeds

he passed on to the third party ....

Third, cases in which bank officials

assured the named debtor, regardless

of his financial capabilities, that

they would look for repayment only

to the third party who actually

received the loan proceeds .... The

three situations described ... could

be characterized as 'sham' or

'dummy' loans, because there was

little likelihood or expectation

that the named debtor would repay.

The knowing participation of [the

defendant] in such loans could

consequently be found to have a

"natural tendency' to injure or

defraud his association and thus

constitute willful misapplication

within the meaning of §657...

16

On the other hand, where the named

debtor is both financially capable

and fully understands that it is his

responsibility to repay, a loan to

him cannot -- absent other circum-

stances -- properly be characterized

as sham or dummy, even if [defendant]

knew he would turn over the proceeds

to a third party. Instead, what we

really have in such a situation

are two loans: one from the

[association] to the named debtor,

the other from the named debtor to

the third party. The [association]

looks to the named debtor for re-

payment of its loan, while the

named debtor looks to the third

party for repayment of his loan.

If for some reason the third party

fails to make repayment to the

named debtor, the latter nonethe-

less recognizes that this failure

does not end his own obligations

to repay the bank. In this situa-

tion the [association] official

has simply granted a loan to a

financially capable party, which is

precisely what an [association]

official should do. There is no

natural tendency to injure or

defraud the bank, and the official

cannot be said to have willfully

misapplied funds in violation of

§656." Gens at 221, 222.

The crux of this quote from Gens,

is founded upon Docherty, supra, is

that there must be a showing that the

Savings and loan official knew the

accommodation maker could not or would

not pay. From each named borrower

called to testify, petitioner established

17

his reality, his awareness of making

the loan and the consequences which .

flowed therefrom in the event of default,

his financial capability, and the fact

that no official of First Federal Savings

and Loan, especially petitioner, had

ever given the borrower any assurance that

he would not be called upon for repayment

if Roberts defaulted.

At the conclusion of the evidence,

the petitioner and all co-defendants

handed up to the Court a carefully worded

Misapplication Instruction Request

defining misapplication which quoted

verbatim from Gens regarding what addi-

tional evidence was needed to establish

the knowledge which a savings and loan

official must have to convert an other-

wise permissible accommodation loan into

a willful misapplication. That instruction

request covered seven legal sheets and

was carefully tailored to the facts of

this trial.5 Instead of anything remotely

Similar, the trial court's only attempt

to define willful misapplication in

general and as it applied in this case

is as follows:

"A willful misapplication is an

unauthorized, unjustifiable, or

wrongful use of the savings) and

loan association's monies, funds,

credits, assets, or securities. A

willful misapplication may be

accomplished by various means, such

See Appendix, p. C-6

18

as the making of a loan which is

insufficiently secured, the making

of a loan where the true recipient

of the proceeds is concealed, or the

making of a loan where there is no

intention to repay, where the maker

is insolvent. A willful misapplica-

tion may also occur where a loan is

made on the strength of fraudulent

applications or statements.

A willful misapplication may

occur when the actual recipient of

the loan is willfully and knowingly

concealed from the savings and loan

association.

However, the term "willfully

misapply" means a criminal misappli-

cation rather than a mere act of mal-

administration or a mere exercise of

bad judgment, or in the misuse of

the association's monies, funds

and credits. In order for there to

be a willful misapplication, the

defendants must convert the associa-

tion's monies, funds or credits to

the use, benefit, or gain of one or

more of the defendants or to some

other person's or company's use,

benefit or gain." (Transcript

pp. 2731-2.)

At the conclusion of the charges,

Petitioner entered strenuous objection

and requested a more detailed explanation

of what constitutes misapplication and

the knowledge which the savings and loan

official must have in an accommodation

loan situation. However, the trial court

declined to instruct further.

»

a9

The trial court's instruction that:

"willful misapplication may be accomplish-

ed by . . . the making of a loan where

the true recipient of the proceeds is

concealed ..." is almost identical to

the instruction reversed in Gens:

"... that Defendant Gens dominated

and controlled Defendants Porter and

Carlton or at least worked in concert

with them to arrange loans to the

persons named in each count in the

indictment, knowing that such person

were not the true borrower and that

Defendant Gens was to be the true

beneficiary thereof, and that each

of such persons was used as the

borrower either with or without the

knowledge and consent of the common

borrower in order to disguise the

concentration of the bank's funds

to Defendant Gens." Gens at 221.

In analyzing this and the other

portions of the charge regarding willful

misapplication, the First Circuit stated:

[1] We think that the indictment

and the charge to the jury, at best,

did not give the jury adequate

guidance as to precisely what acts

constitute willful misapplication

of bank funds in violation of §656.

The most likely interpretation of

the indictment and the court's

charge was that appellants should

be found guilty if it was found

that they granted loans to the

named debtors knowing that the

proceeds would be turned over to

Gens .... Such a finding by itself

20

is not sufficient to constitute

willful misapplication under §656.

Therefore, the convictions cannot

stand.

While Petitioner and his co-defendants

were trying to convince the Fourth Circuit

of the error in the trial court's charge,

precisely the same issue was being argued

in the Third Circuit for precisely the

same reasons in U.S. v. Gallagher, 576

F.2d 1028 (1978). However, the Third

Circuit came to exactly the opposite

conclusion and reversed because of the

defective instructions. In Gallagher the

bank official had been convicted of will-

ful misapplication for having made

accommodation loans to various named

parties for home improvements, the

proceeds of which were turned over to a

third party for business purposes pro-

scribed by the federal banking regulations.

Although the Third Circuit carefully

points out that even if the named borrowers

had no intention of repaying the loans,

the question for the jury is not what was

in the minds of the named borrower and the

third party beneficiary, but what knowledge

did the bank official have at the time

the loans were made. In Gallagher the

trial court instructed much the same as

the trial court in this case:

"The money or funds of a bank

are misapplied when they are taken

Or appropriated or channeled, that

is converted, to the use and benefit

of the bank officer or employee or

some third party. There is mis-

application if the money or funds

are diverted to an unauthorized or

unjustified or wrongful use.

21

The law does not treat as a

misapplication the making of a bad

loan, or a careless or negligent

handling of money. It does not

treat as a misapplication the making

of a loan with poor judgment or any-

thing of that nature.

The evidence must show something

more than that, because the law

requires that the misapplication be

done knowingly and with a specific

intent to either injure or defraud

a bank.

In considering each of the loans

involved in this case, if the

evidence persuades you beyond a

reasonable doubt that the bank officer

or employee made the loan to an

individual as a personal or consumer

loan, or as a home improvement loan,

and that at the time the loan was

made he knew or had reason to know

that the real borrower was someone

else, and that the real purpose

was a business rather than a personal

use, then you may find that the loan

was a willful misapplication of bank

funds with the intent to either

injure [sic] or defraud the bank."

Gallagher at 1046.

In holding this instruction fatally

defective, the Third Circuit approved

in toto the three-category analysis of

Gens and stated that the above charge

was defective because of the very reason

petitioner is urging this writ be granted:

"the trial court failed to charge the

jury that it must find that Fredenburgh

22

(the bank official) knew that those named

as debtors lacked the ability or intent

to repay the loans." (Emphasis added)

Gallagher at 1046.

Likewise, the instructions of the

trial court for which this writ is

requested would have been reversed under

the guidelines set down by the First and

Third Circuit and petitioner believes

those guidelines are correct and based

his defense in reliance thereupon.

Since the Second Circuit discussion

of the foreseeability and knowledge

required to establish a "willful misappli-

cation" in the accommodation loan situation,

three other Circuits have written lengthy

Opinions struggling with the proper

definition of "willful misapplication"

to be given a jury when considering

whether a bank official misapplied funds

by making loans to a named borrower knowing

that borrower was obtaining the funds

solely for the benefit of a third party

that could not obtain the loan directly:

the First Circuit in Gens, the Third

Circuit in U.S. v. Gallagher, 576 F.2d

1028 (1978) and the Sixth Circuit in

U.S. v. Cooper, 577 F.2d 1079 (1978).

As Judge Engel so well pointed out

in his opinion of June 8, 1978 in Cooper:

"., . . the courts have had

difficulty agreeing upon an adequate

jury instruction covering the offense,

especially with respect to the nature

of the culpability required for a

violation."

23

No more appropriate occasion could

exist for the Supreme Court to correct

the confusion and disagreement among the

Circuits than this petition.

3. In holding that the trial judge's

vior dire procedure was free from

error, the Fourth Circuit Court of

Appeals has denied petitioner trial

by “an impartial jury" as required

by the 6th Amendment to the

Constitution of the United States

of America.

Petitioner moved the court continue

the trial because highly prejudicial and

inaccurate pretrial publicity made

selection of an impartial jury impossible.

In support of this motion, Petitioner

submitted 112 newspaper articles from the

district's three newspapers :of largest

circulation appearing during the five months

preceding and up to the date of the trial

and specifically pointed out the

inaccuracies and highly prejudicial

accounts which caused petitioner such

apprehension, e.g., reporting that Peti-

tioner was directly involved with the

immediately preceding and highly publi-

cized trial of six other Durham businessmen

in a “multi-million dollar conspiracy and

fraud case" and reporting that the peti-

tioner had already pleaded guilty, when

petitioner had nothing whatsoever to do

with the six businessmen tried immediately

before ‘his trial and had never indicated

an intention to enter a plea of guilty.

The Trial Court acknowledged the

existence of such prejudicial and inaccurate

pretrial publicity, but ordered on January

19, 1977s

24

"The motions for change of venue

and for continuance are denied under

the rationale of Wansley v. Slayton,

487 F.2d 90 (4th Cir. 1973);

United States v. Jones, 542 F.2d 186,

193 (4th Cir. 1976), where it is stated

that. 'the proper manner for ascer-

taining whether ... adverse publicity

may have biased ... respective

jurors was through the voir dire

examination (App. 53)'."

Prior to commencing voir dire,

petitioner requested the Trial Court

conduct specific inquiry of those jurors

in the venire panel indicating consider-

able familiarity with the pretrial pub-

licity individually and outside the

presence of the other potential jurors

in accordance with the procedure enunciated

by the Fourth Circuit in Jones, (at 194):

"We did enunciate in the United

States v. Hankish (4th Cir. 1974),

F.2d 71, 77 and reaffirmed in

United States v. Pomponio (4th Cir.

1975 F. ; 3 Cert. denied,

423 U.S. 1015, 96 S.Ct. 488, 46 L.Ed

2d 386 (1975), the rule that, 'when

highly prejudicial information may

have been exposed to the jury, the

Court must ascertain the extent and

effect of the infection, and there-

after, in its sound discretion, take

appropriate measures to assure a

fair trial." In carrying out this

duty, the Court should follow,

we held, the procedure outlined in

Margolis v. United States (7th Cir.

1568) 407 F.2d 127, 135 Cert.

denied, 396 U.S. 833, 90 S.Ct. 89,

24 L.Ed. 2d 84 (1969). There, the

Court said that inquiry should be

25

made whether any jurors ‘had read

or heard' the prejudicial publicity

and, if any had, that juror should

be examined, individually and outside

the presence of the other jurors,

to determine the effect of the

publicity." (Emphasis added)

The Trial Court refused petitioner's

request and upon specific inguiry into

the knowledge juror Claudius Carlton

had obtained from the pretrial publicity,

Carlton stated during a lengthy discussion:

"Quite frankly, in my opinion,

from what I know of the case, the

burden of proof would more likely

be on the defendants to prove their

innocence .... I know that's not

right but that's the way I feel

nonetheless ... I'm just saying

that I'm skeptical that the defen-

dants will be able to counter the

charges against them." (Transcript

95).

Because every juror already empanelled

and the remaining venire was listening

intently to these comments, defendants

immediately moved for a mistrial which

was denied. Thereafter, defendants

again urged the Trial Court to conduct

its specific voir dire examination of

any juror indicating familiarity with

pretrial publicity individually and

outside the presence of the other jurors;

however, this request went unheeded.

As the juror selection process

continued, petitioner listed in disbelief

as Grace D. Gray, another prospective

juror, was allowed to give a detailed

26

description of how she and her family

had read extensively and followed

events as it occurred in the newspapers,

how she saw this trial as a continuation

of those in which others had previously

pled or been found guilty, and that she

thought "it would probably be difficult

for me to be unbiased". (Transcript

pp. 104-6).

In United States v. Perrotta, 533

F.2a 247 (1977), the First Circuit

reversed a conviction under similar

circumstances, stating:

"While much discretion in dealing

with incidents of this nature is

vested in the trial judge, see

United States v. Jones, 542 F.2d

186, 197 & n.9 (4th Cir. 1976), we

agree with the Margoles court that

once the court has actually deter-

mined that one or more of the jurors

has been exposed to prejudicial

publicity, its further investigation

of the matter should be conducted on

an individualized basis so that jurors

will be encouraged to speak freely and

will not repeat prejudicial information

in one another's presence." Perrotta

at 250.

The government does not contend that

prejudicial pretrial publicity did not

occur, it merely argues that the rationale

and procedure of Jones and Perrotta are

limited to prejudicial publicity occurring

during the trial. Petitioner can perceive

of no rational basis for such a distinction

and points this Court to the inflamatory

characterization given by potential jurors

27

Carlton and Gray. Petitionecan see no

justification for saying such discussions

would prejudice jurors during the trial

but not before the trial and urges this

court not to allow the Fourth Circuit's

decision to establish such a distinction.

CONCLUSION

For the reasons set forth in this

petition, we respectfully submit that

certiorari should be granted.

Respectfully submitted,

“ht ae QO. Cefn

William D. Caffrey

Counsel for Petitioner

Post Office Box 989

Greensboro, North Carolina

27402

OF COUNSEL:

NICHOLS, CAFFREY, HILL, EVANS & MURRELLE

Post Office Box 989

Greensboro, North Carolina 27402

28

CERTIFICATE OF SERVICE .

I hereby certify that the foregoing

Petition was served on the appeilee

respondent by depositing three copies

in the United States mail, with postage

prepaid, addressed to the Solicitor

General, Department of Justice,

Washington, D.C., 20530.

This the 13th day of April, 1979.

UDA O.

William D. Caffrey

Counsel for Petitioner

Post Office Box 989

Greensboro, North Carolina

27402

Appendix Al

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,

Appellee,

Ve

ROBERT D. HOLLEMAN, (77-1618),

WILLIAM W. EDWARDS, (77-1619),

JOHN B. HARRIS, (77-1620),

WILLIAM R. WINDERS, (77-1621),

BOBBY R. ROBERTS, (77-1622),

Appellants.

Appeal from the United States District

Court for the Middle District of North

Carolina, at Durham, Robert E. Maxwell,

District Judge. (Chief Judge, United

States District Court for the Northern

District of West Virginia, sitting by

designation.)

Argued May 4, 1978 Decided January 30,

1979

Before HAYNSWORTH, Chief Judge, RUSSELL,

Circuit Judge, and FIELD, Senior Circuit

Judge.

PER CURIAM:

_ On September 6, 1977, William W.

Edwards, John B. Harris, Bobby R. Roberts,

Appendix A2

Robert D. Holleman and William R. Winders

were variously charged in an eighteen

count indictment returned by a grand jury

for the Middle District of North Carolina.

In Count One, all five defendants were

charged under 18 U.S.C. §371 with a con-

Spiracy to misapply funds of First Federal

Savings and Loan Association of Durham,

North Carolina, a federally insured

Savings and loan association, and causing

false entries and statements to be made

in the records and reports of the Associ-

ation in violation of 18 U.S.C. §§657 and

1006. The defendants, Edwards, Harris

and Roberts were charged with thirteen

substantive counts of misapplication in

violation of Section 657. The defendant

Holleman was jointly charged in five of

the misapplication counts and the defend-

ant Winders was charged in four of those

counts. Edwards and Harris were also

charged with three counts of making false

entries in violation of 18 U.S.C. §1006,

and Holleman and Roberts were charged in

Count Eighteen with a violation of Sec-

tion 1006. (This count was dismissed

during the course of the trial.) The

jury returned verdicts of guilty as to

all defendants on the conspiracy charge;

found Edwards and Harris guilty of the

sixteen substantive offenses; Roberts

guilty of the thirteen substantive of-

fenses; Holleman guilty of four of the

substantive offenses and not guiity of

one, and Winders guilty of three of the

substantive offenses and not guilty of

one. Convicted pursuant to the jury's

verdicts, the five defendants have

appealed.

Appendix A3

The charges in the indictment grew

out of loan transactions of the Associa-

tion covering a period of some fifteen

months in the years 1973 and 1974.

During all of that time William W.

Edwards was the President and a director

of the Association, having served as its

managing officer for some eighteen years

prior to the indictment. John B. Harris

was Secretary-Treasurer and a director

of the Association, and he and Edwards,

together with a third director, served

as the Association's loan committee.

Holleman and Winders, both of whom were

attorneys, conducted title examinations,

closed loans and disbursed the proceeds

thereof for the Association.

We have carefully reviewed the record

and in our opinion the evidence suffi-

ciently established that during the

period covered by the indictment Edwards

and Harris caused the Association to

make over four million dollars in "sham"

loans (See United States v. Gens, 493

F.2d 216 (1 Cir. 1974), the proceeds of

which were applied to the defendant

Roberts' interests, and concealed the

true nature of the loans from the Asso-

ciation's directors as well as the ex-

aminers of the Federal Home Loan Bank

by disregarding the established proce-

dures of the Association. While the

attorneys, Winder and Holleman, were not

the primary actors in the conspiracy,

they were willing and knowing conduits

of the funds which were passed along to

Roberts, and participated in the conceal-

ment of the transactions in the records

of the Association.

Appendix A4

Perceiving no error in the conduct of

the trial or in the instructions of the

Court, and finding the evidence suffi-

cient to support the jury's verdicts, we

affirm the convictions.

AFFIRMED.

Appendix A5

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,

Appellee,

Vv.

ROBERT D. HOLLEMAN, (77-1618),

WILLIAM W. EDWARDS, (77-1619),

JOHN B. HARRIS, (77-1620),

WILLIAM R. WINDERS, (77-1621),

BOBBY R. ROBERTS, (77-1622),

Appellants.

Appeals from the United States District

Court for the Middle District of North

Carolina, at Durham. Robert E. Maxwell, —

Chief Judge, Northern District of West

Virginia, sitting by designation.

ORDER

Upon consideration of the petition

for rehearing, it is

ORDERED that the final sentence in

the second paragraph on page three of

the slip opinion is amended to read as

Appendix A6

follows: "Holleman and Winders, both of

whom were attorneys, conducted title ex-

aminations and disbursed the proceeds of

loans for the Association." The original

opinion is reaffirmed in all other

respects.

NOW, THEREFORE, with the concurrence

of Chief Judge Haynsworth and Judge

Russell, and no judge in active service

having requested a poll upon the en banc

suggestion, it is ADJUDGED and ORDERED

that the petition for rehearing is

denied.

S/John A. Field, Jr.

Senior U.S. Circuit

Judge

March 12, 1979. Filed March 14, 1979.

Appendix Bl

UNITED STATES DISTRICT COURT FOR

THE MIDDLE DISTRICT OF NORTH CAROLINA

DURHAM DIVISION

No. Cr-76-238-D

UNITED STATES OF AMERICA,

Ve

JOHN B. HARRIS,

Defendant.

JUDGMENT AND PROBATION/COMMITMENT ORDER

In the presence of the attorney for the

government, the defendant appeared in

person on March 24, 1977 with Counsel.

There being a plea of not guilty, a ver-

dict of Guilty, as charged in Counts 1-17,

defendant has been convicted as charged

of the offense of conspiracy to misapply

funds of a savings and loan association,

the deposits of which were insured by

the Federal Savings and Loan Insurance

Corporation, in violation of 18 U.S.C.

371, as charged in Count 1 of an indict-

ment; of the offense of misapplying and

causing to be misapplied funds of a

savings and loan association, in viola-

tion of 18 U.S.C. 657 and 2, as charged

in Counts 2-14 of an indictment; and of

the offense of making and causing to be

made false entries on the records of a

savings and loan association, in viola-

tion of 18 U.S.C. 1006, as charged in

Counts 15-17 of an indictment.

Appendix B2

The Court asked whether defendant had

anything to say why judgment should not

be pronounced. Because no sufficient

cause to the contrary was shown, or

appeared to the Court, the Court adjudged

the defendant guilty as charged and con-

victed and ordered that: The defendant

is hereby committed to the custody of the

Attorney General or his authorized rep-

resentative for imprisonment for a period

of five (5) years, and he is ordered to

pay a fine of $10,000.00 on Count l.

IT IS FURTHER ORDERED on Counts 2-14

that the defendant is hereby committed

to the custody of the Attorney General

or his authorized representative for im-

prisonment for a period of five (5)

years on each count, to run concurrently

with each other and concurrently with the

sentence imposed on Countl, and he is

ordered to pay a fine of $3,000.00 on

each count.

IT IS FURTHER ORDERED on: Counts 15-17

that the defendant is hereby committed

to the custody of the Attorney General or

his authorized representative for im-

prisonment for a period of five (5) years,

to run concurrently with each other and

concurrently with the sentence imposed on

Counts 2-14 and Count 1, and he is ordered

to pay a fine of $3,000.00 on each count.

S/Robert E. Maxwell

United States District Judge

March 30, 1977

Appendix Cl

iS: § 372

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 commis-

sion of which is the object of the con-

spiracy, is a misdemeanor only, the

punishment for such conspiracy shall not

exceed the maximum punishment provided

for such misdemeanor.

18 § 656

Whoever, being an officer, director,

agent or employee of, or connected in

any capacity with any Federal Reserve

bank, member bank, national bank or in-

sured 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, ab-

stracts, purloins or willfully misapplies

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, direc-

tor, employee or receiver, shall be fined

not more than $5,000 or imprisoned not

Appendix C2

more than five years, or both; but if

the amount embezzled, abstracted, pur-

loined 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 "na-

tional banking association"; "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 "in-

sured bank" includes any bank, banking

association, trust company, savings bank,

or other banking institution, the depos-

its of which are insured by the Federal

Deposit Insurance Corporation,

18 § 657

Whoever, being an officer, agent or

employee of or connected in any capacity

with the Reconstruction Finance Corpora-

tion, Federal Deposit Insurance Corpora-

tion, National Credit Union Administra-

tion, Home Owners' Loan Corporation,

Farm Credit Administration, Department

of Housing and Urban Development, Fed-

eral Crop Insurance Corporation, Farmers

Home Corporation, the Secretary of Agri-

culture acting through the Farmers' Home

Administration, or any land bank, inter-

mediate credit bank, bank for coopera-

tives or any lending, mortgage, insur-

ance, credit or savings and loan corpora-

tion or association authorized or acting

under the laws of the United States or

Appendix C3

any institution the accounts of which

are insured by the Federal Savings and

Loan Insurance Corporation or by the

Administrator of the National Credit

Union Administration or any small busi-

ness investment company, and whoever,

being a receiver of any such institution,

or agent or employee of the receiver,

embezzles, abstracts, purloins or will-

fully misapplies any moneys, funds,

credits, securities or other things of

value belonging to such institution, or

pledged or otherwise intrusted to its

care, shall be fined not more than

$5,000 or imprisoned not more than five

years, or both; but if the amount or

value 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.

18 § 1006

Whoever, being an officer, agent or

employee of or connected in any capacity

with the Reconstruction Finance Corpora-

tion, Federal Deposit Insurance Corpora-

tion, National Credit Union Administra-

tion, Home Owners' Loan Corporation,

Farm Credit Administration, Department

of Housing and Urban Development, Fed-

eral Crop Insurance Corporation, Farmers'

Home Corporation, the Secretary of Agri-

culture acting through the Farmers' Home

Administration, or any land bank, inter-

mediate credit bank, bank for coopera-

tives or any lending, mortgage, insur-

ance, credit or savings and loan corpora-

Appendix C4

tion or association authorized or acting

under the laws of the United States or

any institution the accounts of which are

insured by the Federal Savings and Loan

Insurance Corporation, or by the Adminis-

trator of the National Credit Union Ad-

ministration, or any small business in-

vestment company, with intent to defraud

any such institution or any other company,

both politic or corporate, or any indi-

vidual, or to deceive any officer, auditor,

examiner or agent of any such institution

or of department or agency of the United

States, makes any false entry in any book,

report or statement of or to any such in-

stitution, or without being duly autho-

rized, draws any order or bill of ex-

change, makes any acceptance, or issues,

puts forth or assigns any note, debenture,

bond or other obligation, or draft, bill

of exchange, mortgage, judgment, or

decree, or, with intent to defraud the

United States or any agency thereof, or

any corporation, institution, or associa-

tion referred to in this section, par-

ticipates or shares in or receives ¢@i-

rectly or indirectly any money, profit,

property, or benefits through any trans-

action, loan, commission, contract, or

any other act of any such corporation,

institution, or association, shall be

fined not more than $10,000 or imprisoned

not more than five years, or both.

Amend. 5

No person shall be held to answer for

a capital, or otherwise infamous crime,

unless on a presentment or indictment of

Appendix C5

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 sugject for the same offence

to be twice put in jeopardy of life or

limb; nor shall be compelled in any

criminal case to be a witness against

himself, nor be deprived of life,

liberty, or property, without due process

of law; nor shall private property be

taken for public use, without just compen-

sation

Amend. 6

In all criminal prosecutions, the

accused shall enjoy the right to a speedy

and public trial, by an impartial jury of

the State and district wherein the crime

shall have been committed, which district

shall have been previously ascertained by

law, and to be informed of the nature and

cause of the accusation; to be confronted

with the witnesses against him; to have

compulsory process for obtaining wit-

nesses in his favor, and to have the

Assistance of Counsel for his defence.

Appendix C6

MISAPPLICATION INSTRUCTIONS

Count —_ of _ the indictment charges

with the will-

ful misapplication of funds of First

Federal Savings and Loan Association of

Durham, North Carolina, by causing Loan

Number to be made by said Associa-

tion to , the proceeds

of which were then converted to the use

of Bobby R. Roberts.

To sustain a conviction for willful

misapplication of the funds of First

Federal Savings and Loan Associaiton, or

the aiding, abetting, or participation

thereof, it is necessary that government

prove the following four elements beyond

a reasonable doubt: (1) that the

accounts and deposits of FFSLA were in-

sured by the Federal Savings and Loan

Insurance Corporation; (2) that at the

time of the alleged misapplication,

was an officer, agent,

or employee of the FFSLA or that he

aided and abetted such FFSLA representa-

tives at such time; (3) that the defend-

ants willfully misapplied or aided in or

caused to be misapplied or aided in or

caused to be misapplied the monies or

funds of FFSLA; and, (4) that

acted with the intent to

defraud the institution. (Government

Trial Brief).

"The term 'willfully misapplied' has

generally been held to have no settled

Appendix C7

meaning. See, e.g., U.S. v. Britton,

107 U.8. 655, 669, 2 58.C&. Sid, 27 & Ba.

520 (1883); Mulloney v. U.S., 79 F.2d

566, 581 (lst Cir. 1935), cert. denied,

296 U.S. 658, 56 S.Ct. 383, 802 Ed. 468

(1936)... Instead, during the past hun-

dred years it has been left to the courts

to define the acts which constitute will-

ful misapplication of [an association's]

funds within the meaning of the statute.

During this period several cases have in-

volved situations roughly analogous to

the instant case. [And willful misap-

plication of savings and loan funds has

not been found in many situations wherein

savings and loan officials passed proceeds

of a loan to third parties.] 'The cases

of this type in which willful misapplica-

tion has been found fall into three gen-

eral categories. First, those in which

bank officials knew the named debtor was

either fictitious or wholly unaware that

his name was being used... Second, cases

in which bank officials knew the named

debtor was financially incapable of re-

apying the loan whose proceeds he passed

on to the third party... Third, cases in

which bank officials assured the named

debtor, regardless of his financial

capabilities, that they would look for

repayment only to the third party who

actually received the loan proceeds...

The three situations described...could be

characterized as 'sham' or 'dummy' loans,

because there was little likelihood or

expectation that the named debtor would

repay. The knowing participation of

in such loans

could consequently be found to have a

Appendix C8

‘natural tendency’ to injure or defraud

his association and thus constitute will-

ful misapplication within the meaning of

§657... On the other hand, where the

named debtor is both financially capable

and fully understands that it is his

responsibility to repay, a loan to him

cannot - absent other circumstances -

properly be characterized as sham or

dummy, even if [ [ knew

he would turn over the proceeds to a

third party. Instead, what we really

have in such a situation are two loans:

one from the [association] to the named

debtor, the other from the named debtor

to the third party. The [association]

looks to the named debtor for repayment

of its loan, while the named debtor looks

to the third party for repayment of his

loan. If for some reason the third

party fails to make repayment to the

named debror, the latter nonetheless

recognizes that this failure does not

end his own obligation to repay the

bank. In this situation the [associa-

tion] official has simply granted a

loan to a financially capable party,

which is precisely what an [association]

official should do. There is no natural

tendency to injure or defraud the bank,

and the official cannot be said to have

willfully misapplied funds in violation

of §657." U.S. v. Gens, 493 F.2d 216,

222 (1974).

Unless, ladies and gentlemen of the

jury, you find either

knew to be a fic-

titious person Or wholly unaware that

Appendix C9

his name was being used; or

knew was financially

incapable of repaying the loan; or

had assured

that payment would not be sought from

him in default, then you cannot convict

of willful mis-

application for this reason.

In determining whether an individual

is "financially capable" you must con-

sider (1) the existing and potential

developed value of the property used as

security; (2) the total assets of the

named borrower; and, (3) the future

earning capacity of the named borrower.

All three combine to establish "finan-

cial capability". In addition, if you

find that this loan was an accommodation

loan as I have just described, you may

consider the financial capability of the

third party.

The last element requires proof that

acted with the in-

tent to defraud First Federal Savings

and Loan Association. Even though you

believe that misapplied

the funds of the association, you must

acquit him if the government has not con-

vinced you with evidence beyond a rea-

sonable doubt that he acted with that

level of criminal intent which I will

now explain. The level of intent required

by the statute is the specific intent to

defraud or injure the association. U.S.

v. Arthur, case #74-2276, decided Nov. Il,

1976, at 15 (4th Cir. 1976). To "defraud"

Appendix C10

the association necessarily requires

evidence that

received some specific benefit or ad-

vantage and that a corresponding injury

is inflicted on the association. U.S.

.v. Lee, 12 F 816, at 819 (2nd Cir. 1882).

The word "injure" is used to designate

pecuniary or financial loss to the asso-

ciation. U.S. v. Arthur, supra. To

find guilty, you

must find from the evidence beyond a

reasonable doubt that he acted with one

of these specific intents -- the intent

to defraud the association, thereby in-

juring it and benefiting himself, or the

intent to injure the association

financially.

Since it is difficult to know the in-

tent of an individual, intent may be

proved by circumstantial evidence.

Breese v. U.S., 106 F 680, 687 (4th Cir.

1901). Hyde v. U.S., 15 F 2D 816, 822

(4th Cir. 1926). One factor of circum-

stantial evidence is the acts themselves.

It is reasonable to infer that a person

ordinarily intends the natural and

probable consequences of his acts. The

jury may draw the inference that the

accused intended all of the consequences

which one standing in like circumstances

and possessing like knowledge should rea-

sonably have expected to result from any

intentional act. U.S. v. Arthur, supra

at 16. Therefore, the jury may also

consider the results of Mr. Edwards’ acts,

including whether or not the association

suffered a loss and whether or not such

loss should have been, at the time of

Appendix Cll

defendant's acts, reasonably foreseen

as a natural and probable effect of

these acts. U.S. v. Kenney, 90 F 257,

267 (3rd Cir. 1898) and U.S. v. Laws,

66 F 2d 870, at 871 (10th Cir. 19533).

It is now proper to call your atten-

tion to several administrative regula-

tions published by the Federal Home Loan

Bank Board. These regulations I now

quote have been referred to by both the

government and the defense. I will now

read you the actual wording of those

regulations which you shall accept as

accurate:

12 CFR

§563.9-3. Loans to one borrower.

(a) Definition of terms. For the

purposes of this section the term

"one borrower" means (1) any person

or entity that is, or that upon the

making Of a loan will become, obli-

gor on a loan, (2) nominees of such

obligor, (3) all person, trusts,

partnerships, syndicates, and corpo-

rations of which said obligor is a

nominee or a beneficiary, partner,

member, or record or beneficial

stockholder owning 10 percent or

more of the capital stock, and (4)

if such obligor is a trust, partner-

ship, syndicate, or corporation, all

trusts, partnerships, syndicates, and

corporations of which any beneficiary,

partner, member, or record or benefi-

cial stockholder owning 10 percent or

more of the capital stock or such

Appendix Cl2

Obligor; and the term "total balances

of all outstanding loans" means the

Original amounts loaned by an insured

institution plus any additional ad-

vances and interest due and unpaid,

less repayments and participating

interests sold and exclusive of any

loan on the security of real estate

the title to which has been conveyed

to a bona fide purchaser of such real

estate,

(b) Limitations. No insured in-

stitution shall have outstanding any

loan to one borrower, as defined in

paragraph (a) of this section, if the

sum of (1) the amount of such loan and

(2) the total balances of all out-

standing loans owed to such institu-

tion and its service corporation

affiliates by such borrower exceeds

an amount equal to 10 percent of such

institution's withdrawable accounts

Or an amount equal to such institu-

tion's net worth, whichever amount is

LOSBe 6000

12 CFR §563.17(c)

(1) Records with respect to loans

on the security of real estate. The

records of an insured institution with

respect to each loan which such insti-

tution makes on the security of real

estate shall include: ...

(vi) Documentation showing the

date, amount, purpose and recipient

of every disbursement of the proceeds

Appendix C13

of such loan, whether such disburse-

ments are made directly by such in-

stitution or through escrows or

other persons or concerns: ... -

12 CFR

§545.6-14 Loans to finance acqui-

sition and development of land....

(c) Loans to finance acquisition

and development of land. No loan

shall be made under this paragraph

in an amount equal to more than 75

percent of the value of the real

estate security therefor as of the

completion of the development there-

of into building lots or sites ready

for construction thereon. Each loan

shall be repayable within a period of

not more than 5 years and the interest

thereon shall be payable at least

semi-annually. No disbursement of

any of the proceeds of any loan made

under this paragraph shall be made at

any time if such disbursement, to-

gether with the aggregate amount of

such proceeds previously disbursed

by the association and not repaid to

it, would exceed an amount equal to

75 percent of the value at such time

of (1) that portion of the security

property which is building lots or

sites the development of which is in

progress or completed and (2) the re-

maining security property.

From direct and cross-examination you

are certainly aware that the government

contends one or more of these regulations

Appendix Cl4

was violated and the defense contends

none were violated. However, you

should be aware that a mere violation

or attempted violation of these regula-

tions is not criminal misapplication.

Such a violation is neither a felony

nor a misdemeanor. Even if you find

there was an agreement to violate these

regulations, it would not constitute

criminal misapplication. Further, if

you determine a violation has occurred,

these unauthorized or illegal acts are

not criminal acts. You must distinguish

between the maladministration of the

affairs of a savings and loan association

and criminal misapplication of the funds.

U.S. v. Britton, supra at 525. Now, some

of the possible remedies provided for

such wrongful expenditures or unautho-

rized use of funds by the savings and

loan statutes and regulations are: the

association's loss of federal insurance,

removal of responsible directors, or the

liability of those directors for any

damages sustained by the association or

its shareholders. But such acts are not

criminal offenses. U.S. v. Harper, 33 F

471, at 478 (6th Cir. 1887).

Therefore, whether or not

caused the association to violate the

before read regulations should be con-

sidered as only one of the factors

determining intent.

There are other factors which bear on

his intent which you may consider and

give either equal, greater or lesser

weight.

ie own personal

financial interest in the welfare

Appendix C15

of First Federal Savings and Loan.

U.S. v. Laws, supra at 827, footnote

, fi

aie and First

Federal's previous 20 years of

dealing with Mr. Roberts and his

associates.

-- and First

Federal's previous dealings with each

named borrower.

-- The economic factors operating

within the Durham and to some extent

the state or national savings and

loan industry during the years 1972,

1973, and 1974,

-- The potential profitability of

each loan under consideration.

-- The divergence of opinions

interpreting the before cited regu-

lations between the Federal Home

Loan Bank Examiners.

-- The similarity or divergence of

the loan procedures here used and

those used by First Federal on other

loans.

The last factor I will mention -- and

I do not mean to indicate that there

could not be other factors which might

reflect on intent --

is his reputation -- not because it

entitles him to special treatment but

because it may reasonably be related to

Appendix C16

whether or not the defendant acted with

the required intent. The evidence of

the good character of the defendant

ought to be given great weight by the

jury. In resolving any doubt which the

jury may have as to the criminal knowl-

edge or intention of the defendant, the

uncontradicted proof of his former good

character for honesty and integrity

should have great weight, and be allowed

to settle that doubt in his favor.

Breese v. U.S., supra, at 820.

I remind you that the intent to de-

fraud or injure the association is an

essential element of the offense charged,

and if you entertain a reasonable doubt

as to the defendant's intent to defraud

or injure the association, you should

acquit the defendant of those counts

charging willful misapplication.

Furthermore, if you find that some of

the transactions involved are susceptible

to different interpretations or infer-

ences, you must adopt the inference

favorable to the accused. Hyde v. U.S.,

supra, at 820. In other words, 1f you

can reconcile the evidence with any

reasonable hypothesis consistent with

the innocence of the accused, it is your

duty to do so, and in that case the

verdict should be "Not Guilty." Breese

v. U.S., supra, at 687 U.S. v. Lee,

Supra, at °