Opposition Brief — Mann v. United States

In the Supreme Court of the United States

OCTOBER TERM, 1975

No. 75-619

ROBERT A. MANN AND BANK OF THE SOUTHWEST,

NATIONAL ASSOCIATION, PETITIONERS

V.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

MEMORANDUM FOR THE UNITED STATES IN OPPOSITION

Petitioners contend that the acts charged in the indict-

ment do not constitute a conspiracy to misapply bank

funds in violation of 18 U.S.C. 371 and 656, and that the

government misled them into believing that their conduct

was proper.

An indictment filed 'n the United States District Court

for the Southern District of Texas charged petitioner

Robert A. Mann, Chairman of the Board of Directors and

Chief Executive Officer of the First National Bank of

Waco, Texas (“Waco Bank”), and petitioner Bank of the

Southwest. National Association, of Houston, Texas, with

conspiring from December 1969 until February 1972

knowingly and willfully to misapply funds of the Waco

Bank with intent to injure and defraud the Waco Bank, by

(1)

2

causing its funds to be converted to the use, benefit, and

advantage of Mann, in violation of 18 U.S.C. 371 and 656.!

More particularly, the indictment charged a scheme where-

by Mann borrowed $6,900,000 from the Bank of the South-

West to purchase a controlling interest in the Waco Bank.?

Bank of the Southwest charged Mann only 3 percent inter-

est on his loan, although at that time the bank’s prime rate

was 84 percent. In return for this preferential rate, Bank of

Southwest required Mann to cause funds of the Waco Bank,

in an amount equal to the unpaid principal, to be placed in

a non-interest bearing account at Bank of the Southwest.’

The indictment alleged that these funds of the Waco Bank

thereby were converted to Mann’s use and benefit, since

the granting of the 3 percent preferential interest rate

would save Mann approximately $350,000 in interest

charges per year.4

In response to petitioners’ pre-trial motions to dismiss

the indictment, the district court held an evidentiary hear-

ing and on July 23, 1974, issued a Memorandum and Order

dismissing the indictment (Pet. App. B); the court of ap-

peals reversed (Pet. App. A).

'The full text of the indictment is reprinted in a footnote to the

court of appeals’ opinion (Pet. App. A-3- A-6. n. 1).

2Bank of the Southwest was to fund $4,000,000 of this amount,

with the remaining $2,900,000 to be raised by Republic National

Bank.

‘The bill of particulars specified that these funds of the Waco

Bank were to be deposited in a demand account in the name of the

Waco Bank (see Pet. 5-8. n. 2).

‘The indictment further alleged that Mann was to reduce the

unpaid balance of his loan to $3,000,000, and at the same time the

amount of the Waco Bank funds on deposit in the demand account at

the Bank of the Southwe:t would be reduced to $3,000,000. Mann

then was to pay 4 percent ‘nterest on the remaining balance of his

loan, and at that preferential rate. Mann would save approximately

$110,000 in interest charges per year.

3

1. This petition challenges the court of appeals’ conclu-

sion that the pre-trial motion to dismiss should have been

denied. It thus comes at an interlocutory stage of the

proceedings, seeking to bring the case here before the

record is fully developed at trial. Since the questions peti-

tioners seek to have this Court now review can be con-

sidered after a trial on the merits, and, if petitioners are

acquitted, need not be considered by this Court at all.

there is no present need for review by this Court,

even if the issues presented might otherwise warrant

further review, which we believe they do not.

2. Petitioners contend that the indictment, as “clarified”

by the bill of particulars, fails to make out a conspiracy

willfully to misapply bank funds, in violation of 18

U.S.C. 371 and 656. It is their theory that Waco Bank’s

retention of legal title to the funds on deposit in the Bank

of the Southwest precludes a showing that the funds were

converted, which they contend is a necessary element of

the offense defined in 18 U.S.C. 656 (Pet. 15). We think it

clear that when a bank officer commits millions of dollars

of bank funds to a use from which he derives extensive

personal benefit with little or no benefit to the bank, there

has been a criminal misapplication of the bank’s funds.

In any event, in this case there was a conversion despite

the Waco Bank’s retention of legal title to the funds. The

maintenance of the account at the Bank of the Southwest

deprived the Waco Bank of the actual possession of its

money. See United States v. Brookshire, 514 F.2d 786

(C.A. 10): cf. Pan American Petroleum Corp. v. Long,

340 F.2d 211, 219-221 (C.A. 5). certiorari denied, sub nom.

Southwestern Life Insurance Co. v. Pan American Petro-

leum Corp., 381 U.S. 926. Additionally, petitioners’ agree-

ment to maintain the Waco Bank’s account at levels cor-

responding to the unpaid balance of Mann’s personal loan

deprived the Waco Bank of its right to unfettered control

of its own funds while Mann’s loan remained unpaid. The

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Waco Bank thereby was prevented from exercising the

right to use its own funds for its own benefit —for example.

by depositing those funds in an interest bearing account.

This interference with the Waco Bank’s enjoyment and

use of its Own money constituted a classic instance of

conversion. See United States v. Brookshire, supra; cf.

A. C. Rent-A-Car, Inc. v. American Nat. Bank & Trust Co.,

339 F. Supp. 506, 511 (S.D. Ala.), affirmed per curiam,

477 F.2d 564 (C.A. 5); Veeco Instruments, Inc. v. Candido,

70 Misc. 2d 333, 334 N.Y. Supp. 2d 321 (N.Y. Sup. Ct.).

3. Petitioners argue further that they were not given fair

notice that their conduct was criminal because the govern-

ment misled them into believing that their activities were

proper (Pet. 18-23). But this claim amounts to an asser-

tion that there was no willful misapplication of funds; it

is thus an issue for resolution at trial, not a proper basis for

dismissal of an indictment under Rule 12. Fed. R. Crim.

P. See United States v. Knox, 396 U.S. 77, 83 n. 7.5

In any event, the government did not mislead petitioners

into believing that their loan scheme was proper. Peti-

tioners’ argument rests primarily on a confusion between

government support for the traditional and legitimate use

of a compensating balance (where the borrower is required

to maintain an account with the lending bank correspond-

ing to the size of his loan) as government approval for the

improper use of a compensating balance (where a third

party—here, the Waco Bank—which receives no benefit

from ¢ loan, is required to maintain the corresponding

balance with the lending bank).

It is true that in 1970, in a letter to a Senate committee,

the Antitrust Division of the Department of Justice urged

Congress not to outlaw the traditional use of compensating

balances. 116 Cong. Rec. 32125-32126 (1970). Similar

5For example, with regard to the issue of willfulness, we are advised

that the government's evidence at trial will show deliberate efforts by

petitioner Mann to conceal critical aspects of these transactions from

bank auditors.

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views were expressed in letters to Congress by officials

of the Department of the Treasury and the Federal

Reserve Board, and in a report by the Senate Committee

on Banking and Currency. /d. at 32124-32129; S. Rep.

No. 91-1084, 91st Cong., 2d Sess. 17 (1970). A reading of

these letters and the Senate report shows, however, that

approval was expressed solely for the traditional use of

compensating balances. There have been no government

pronouncements approving the type of compensating bal-

ance loan employed by petitioners. Indeed, that type of

scheme was specifically disapproved in Banking Circular

No. 31 (Pet. App. C-6). which was circulated to the banking

community in October 1970. The misapplication of funds

charged in the indictment continued after this date; in fact,

the preferential loan was renewed thereafter.®

Under these circumstances, petitioners’ reliance on

United States v. Laub, 385 U.S. 475; Bouie v. City of

€ olumbia, 378 U.S. 347: and Raley v. Ohio, 360 U.S. 423,

is misplaced.” In those cases, this Court held that the

*We are unable to discern the basis for petitioners’ assertion

(Pet. 22) that this Court’s decision in Coffin v. United States, 156

U.S. 432, precludes reliance on the renewals of the loans as consti-

tuting misapplication of the bank funds. Coffin does not discuss

renewals of improper loans; it holds first that the refusal to instruct

concerning the presumption of innocence and the instructions given

concerning the burden of proof were error, and second that the offense

of making a false entry is not committed where the transaction en-

tered, through improper, actually occurred. 156 U.S. at 463.

“Petitioners also mistakenly rely on United States v. Insco, 496

F.2d 204 (C.A. 5), where the court reversed a conviction for conduct

which had been shown at trial to have been generally accepted as

proper. Their allegations in this regard amount to a contention that

their actions were not willful, a controverted issue that is to be de-

cided by the finder of fact after trial. As the court below noted (Pet.

App. A-18, n. 7):

* * * The decision in /nsco is authority only for the proposi-

tion 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

TPT ELI NR ONS PE AEE Tt OEE OEE ELE PARI NED me ee ee < ~

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government may not prosecute a citizen after actively mis-

leading him by authoritative assurances that his conduct

was proper: here. the government gave no_ such

assurances.

case, which is whether the Government 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 /nsco defense under the

facts of this case, defendants will have an opportunity to raise

it at trial. Cf. United States v. Pennsylvania Indusirial Chemical

Corp., 411 U.S. 655, 674-675, 93 S.Ct. 1804, 1816-1817. 36

L.Ed.2d 567 (1973); United States vy. Murdock, 290 U.S. 389,

395-396, 54 S.Ct. 223, 225-226, 78 L.Ed. 381 (1933).

“Petitioners cite a letter written on May 4, 1971, by the then

Chief of the Fraud Section of the Criminal Division of the Depart-

ment of Justice (Pet. 13) and one written on March 21, 1973, by the

Office of the Comptroller of the Currency, expressing reservations

about the wisdom or feasibility of initiating prosecutions for the

making of compensating balance loans of the type employed by

petitioners, where the loans were made before the issuance date of

Circular 31. These letters, however, did not imply that this type of

compensating balance loan was a proper banking arrangement.

nor that particularly egregious transact‘ons or loans renewed after

October 1970 should not be prosecuted.

Moreover, it is the prerogative of the executive to initiate crim-

inal proceedings, and courts should not “interfere with the free ex-

ercise of the discretionary powers of the attorneys of the United

States in their control over criminal prosecutions.” United States

v. Cox, 342 F.2d 167. 171 (C.A. 5). certiorari denied sub nom. Cox v.

Hauberg, 381 U.S. 935. a

Petitioners also refer to recent actions by the Board of Governors

of the Federal Reserve System approving the formation of bank hold-

ing companies to acquire certain banks. which, they contend,

indicate *he Board's approval of the type of transaction involved here

(Pet. 23-24; Pet. App. D-1— D-11). These actions. occurring in Septem-

ber 1974 and thereafter. could hardly have motivated petitioners’ con-

duct between December 1969 and February 1972. the dates of the

charged conspiracy. In any event. petitioners rely upon the character-

ization of the approved transaction by the dissenting members of the

Federal Reserve Board. The Assistant Secretary of the Federal

Reserve Board has informed us that it is not the policy of the Federal

Reserve System to approve compensating balance loans of the type

involved here. and the dissents in the cases upon which petitioners

rely reflect simply disagreements concerning the analysis of the

facts involved in those cases. The full text of the Assistant Secre-

tary’s response to our inquiry concerning these cases ts contained

in the government's reply brief in the court below. a copy of which

we are lodging with the Clerk of this Court.

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4. Petitioners assert that the court of appeals improperly

concluded that petitioners’ defense of lack of notice should

be considered at trial, rather than on a pre-trial motion

under Rule 12, Fed. R. Crim. P. They cite Laub, supra,

in support of their claim (Pet. 26-27). Laub involved a

charged violation of 8 U.S.C. 1185(b). In concluding that

the acts charged in the indictment did not constitute a

violation of that statute, and thus that the indictment was

properly dismissed, this Court rested its decision “en-

tirely upon our construction of the relevant statutes and

regulations” (385 U.S. at 477). Here, the construction of

the relevant statutes and regulations leads to no such con-

clusion. Petitioners argue instead that they are entitled to

acquittal since they so construed the statute. This, as the

court below correctly concluded, is a defense going solely

to the issue of intent, and thus properly is a matter for

consideration on the trial of the general issue.’

It is therefore respectfully submitted that the petition

for a writ of certiorari should be denied.

RoBERT H. Bork,

Solicitor General.

JANUARY 1976.

‘United States v. Covington, 395 U.S. 57, on which petitioners

also rely, is not to the contrary. That case holds that a defense of

self-incrimination to a Marihuana Tax Act prosecution may often be

a defense “capable of determination without the trial of the general

issue” (id. at 60) and thus appropriate for resolution on a pre-trial

motion under Rule 12, Fed. R. Crim. P. In contrast. a defense going to

whether or not petitioners acted willfully is directly related to the trial

of the general issue—-whether there was a willful misapplication of

bank funds.

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