Business Crimes Can't Be Proven Just By The Company You Keep; The Sixth Circuit Reverses For Insufficient Evidence
One of the most disturbing trends in federal law enforcement, is the way the criminal law is being used to regulate business practices.
If someone commits a substantial fraud - that's an appropriate basis for a prosecution. But we shouldn't put people in prison just because something bad happens in business.[FN1]
The Sixth Circuit's opinion in United States v. Parkes is a good example of why prosecution shouldn't be the best option for a bad business decision (as opposed to, say, regulatory enforcement action, or a civil suit).
Timothy Parkes and Mark Mourier had a vision. They wanted to start a company that would manufacture and distribute floor mats for automobiles.
They started the company in Canada, but soon moved it to Benton, Tennessee. It grew to become one of the largest employers in Benton.
Of course, any business needs a relationship with a bank. Mr. Parkes and Mr. Mourier developed a relationship with the President of Benton Bank - Jim Goddard.
At one point, Parkes and Mourier had an idea - a fantastically bad idea. They would change their manufacturing process, and make floor mats using untested chemicals. It required them to redesign and upgrade their manufacturing process - a massively expensive proposition.
The end result of the upgrade was that Remington made floor mats that would melt in the summer heat.
This change cost the company more than $1.5 million from 2000 through 2002. They retooled their company, and shut down the new manufacturing line. They started buying floor mats made in China - converting from being a manufacturer to a distributor. This transition was going well, but they needed money to keep going.
As a result, the company had to go to Mr. Goddard to borrow more money from Benton Bank.
Benton Bank was a small bank, with less than $10,000,000 in capital. The FDIC wouldn't let Benton Bank lend more than 25% of its capital to any one customer.
Remington's loans exceeded these limits. As a result, Mr. Goddard asked Remington to borrow money from someone else.
Remington did. They borrowed from a private equity firm, and repaid Benton Bank. As a part of the deal, Benton Bank had to agree to issue an irrevocable line of credit to Remington.[FN2]
Remington then defaulted on the private equity firm's loan, and the private equity firm forced Benton Bank to honor its line of credit.
Things were a little hairy at that point. Benton Bank honored its line of credit, but was then in violation of the FDIC's requirements. Then, Mr. Goddard had a very clever idea.
Mr. Goddard was, as it happens, already embezzling sums of money from Benton Bank. He was a man who knew his way around the fraudulent booking of a loan.
Faced with a need to make the FDIC think that his bank's position was not in violation of their regulations, he simply booked ten small loans to non-existent entities, then took the total of those loans and gave the money to Remington.
Problem solved. Sort of.
Mr. Goddard Gets In Trouble
As the court of appeals noted, "[e]ventually Goddard's years of wrongdoing unraveled and he left the Bank."
After he left, and as things were starting to move to federal law enforcement's attention, someone found a fax in Mr. Goddard's office, which was a printed email to the lawyer for Remington. The email that was faxed was from Mr. Parkes, and copied Mr. Mourier, and listed ten new companies that Mr. Parkes sought to have the lawyer create.
The ten company names were the same companies that Mr. Goddard used to create the fake accounts on Benton Bank's books.
Mr. Parkes and Mr. Mourier Get Into Trouble
This was enough for the FBI. Mr. Parkes and Mr. Mourier were indicted for bank fraud.
Though Mr. Goddard was a government cooperator, he was not called by the government as a witness. Instead, the government relied heavily on the fax as evidence that Mr. Parkes and Mr. Mourier knew what Mr. Goddard was doing.
This was enough for the jury. Or, at least it was as to Mr. Parkes. After trial, Mr. Parkes was convicted of ten counts of bank fraud. Mr. Mourier was acquitted.
The Sixth Circuit
This evidence, however, was not enough for the Sixth Circuit. Its not often to see a court of appeals reverse a conviction for sufficiency of the evidence, but they did. In a lovely turn of phrase, the court concluded that,
Even viewing the record in the light most favorable to the government, there was insufficient evidence to connect Parkes to Goddard's fraud, much less to prove beyond a reasonable doubt that Parkes intended that fraud. Surprisingly, the government offered no testimony from Goddard to establish that Parkes cooperated in, or even knew of, the scheme, even though Goddard had already pleaded guilty with an agreement requiring him to testify "completely and truthfully . . . if called upon by the United States to do so." While that failure does not directly impact the sufficiency of the evidence, it does leave the evidentiary cupboard nearly bare.
Not content to stop there, the court of appeals then went on to criticize the district court for not allowing the defense to introduce evidence of Mr. Goddard's prior embezzlement, and to criticize the prosecutor for an inappropriate argument in closing.
The inappropriate argument was particularly bad. The prosecutor told the jury that an acquittal would let Parkes and Mourier keep $4 million dollars. But the prosecutor already knew that the money had been paid back to the bank. Indeed, the prosecutor had argued - successfully - not to let that evidence get to the jury.
This is a fantastic case - it's a lovely rebuke to the government for assuming that everyone who deals with a bad apple is, herself, bad.
[FN1] - Relatedly, the idea that any time there's a recession someone on Wall Street should go to prison radically misunderstands the proper function of a system of criminal justice. Sure, if you want to form an angry mob and attack the people who caused something bad, sending executives to prison for bad decisions makes sense. But a more enlightened view is that the government ought to first prove that a person did something that she knew was a crime before she is sent to prison, not just that she worked on Wall Street shortly before the economy took a nosedive.