691 N.E.2d 760 | Ohio Ct. App. | 1997
We hold that Gaul cannot be convicted of the crime of dereliction in his official duties because (1) the county prosecutor has not charged him with violating statutes making his alleged mismanagement a crime, and (2) the state did not produce any evidence that Gaul failed to safekeep documents evidencing certain risky investments.
We do not suggest that Gaul is blameless in failing to supervise improvident investment activities of his subordinates. The issue here is not whether the treasurer is civilly liable for the $115 million of public money his deputy treasurers lost in the declining bond market of 1993 to 1994. Ironically, the very sections of the Ohio Revised Code used to prosecute Gaul as a criminal spell out the parameters of civil legal liability. *842
Before 1986, all moneys belonging to Cuyahoga County were held by its treasurer in bank accounts where they earned little or no interest. In 1986, the Board of Commissioners of Cuyahoga County decided to take advantage of certain provisions of the Uniform Depositary Act, R.C.
In 1991, the investment committee decided to expand the ABC program to allow other governmental entities to participate. The goal was to further maximize profits by pooling capital from surrounding communities. In June, it created the Secured Assets Fund Earnings ("SAFE") program.
As the acronym suggests, the program was intended to provide a relatively secure investment fund in which public entities could place inactive funds without worrying about losing principal. Cuyahoga County guaranteed all investments against loss. Additionally, the investment committee promulgated procedural manuals containing policies focused on controlling risk. For example, the fund could not invest in the full range of securities allowed by statute, but only in higher quality securities, such as United States Treasury and Agency bonds, which are backed by the full faith and credit of the federal government and pose virtually no risk that the investor will lose principal. Also, all moneys deposited were to be invested according to a strict maturity ratio: forty percent of the deposits in short-term securities, forty percent in medium-term securities, and twenty percent in long-term securities. It was intended that the securities would merely be held to maturity, and the ratio was designed to ensure that the fund had enough cash to meet demands for withdrawals1 and for other short-term needs.
To implement the anticipated trading, the treasurer created an investment department composed of eleven individuals. Six persons actively executed trades while five others acted as liaisons between SAFE and any local governmental subdivisions choosing to participate in the fund. The department was managed by Timothy Simmerly, who reported directly to Gaul. In the normal course of *843 business, the investment office prepared daily activity reports of all trades, and provided the county auditor with a yearly report detailing the entire portfolio.
The security measures and the county's earnings history convinced as many as seventy cities, school districts and special districts, as well as Summit and Lorain Counties, to invest their inactive funds in the SAFE program.
Two types of investments authorized by R.C.
"A repurchase agreement transaction, or repo, as it is commonly referred to, is a short-term investment vehicle that can be used for cash management purposes by an institutional investor. The repo is a hybrid loan/sale transaction that centers around the sale of long-term financial instruments * * *, either on a demand basis, or at the end of a fixed (generally short) term. The long-term financial instruments which are used in the repo generally consist of U.S. Treasury securities, commercial paper, corporate securities, or whole loan mortgages.
"In each repo transaction, one party is a provider, and one party is a user, of funds. The provider of funds (hereinafter `Buyer') enters into a contract with a user of funds (hereinafter `Seller'), whereby the Buyer purchases agreed-upon financial instruments, while the Seller simultaneously agrees to buy back the financial instruments at a specified date, or on the buyer's demand, for a price exceeding the purchase price. The additional amount received by the Buyer upon resale of the financial instruments reflects the accrued interest which is earned on the transaction. From the perspective of the Seller, the transaction is referred to as a `repo', whereas from the perspective of the Buyer, the transaction is referred to as a `reverse repo.'" Spielman, Whole Loan Repurchase Agreements: An Assessment of Investment Transaction Risk in Light of Continuing Legal Uncertainty (1994), 99 Commercial L.J. 476, 476-477.
In essence, the county "sold" existing bonds to other institutional investors, thereby obtaining cash, and agreed to repurchase the bonds at a specified date for a price slightly higher than the original sale price. The net effect of the transaction is that the county temporarily transferred bonds to another institution in exchange for a short-term loan at a fixed interest rate, which is really borrowing money against existing assets that were pledged to secure the loan.2 The county could then use the proceeds to finance other bond purchases. If all *844 went well, the county earned a higher interest rate on the interim investments than it had to pay under the repurchase agreement, thereby showing a profit.
These repurchase agreements, which were authorized by the county's investment manual, were approved by the Cuyahoga County Prosecutor, independent bond counsel, and the county advisory committee.
By using these and other investment techniques,3 the SAFE program continued to earn tremendous amounts of money, boasting profits in excess of $400,000,000 at one point.
Some time in 1987, Simmerly asked the county auditor's accountant for advice on how to report repurchase agreements that had not been settled by year's end. He apparently placed them in an inappropriate account. The accountant told Simmerly that the repurchase transactions should not be recorded in that particular account; unfortunately, Simmerly misunderstood this remark and directed the investment department to leave all repurchase agreements off the balance sheet. Until 1993, those accounts were listed in year-end financial statements submitted to the state auditor, but did not appear on daily reports compiled by Simmerly's staff.
In 1993, a booming national economy threatened to spur inflation, so the Federal Reserve Bank increased interest rates to slow economic growth. As a result of these interest rate increases, bond prices fell.4 Disregarding a requirement in R.C.
In September 1993, SAFE "sold" $185 million in large blocks of bonds under written repurchase agreements. Initially, the arrangement generated about $3.7 million for the fund from the difference in interest rates. However, as interest rates increased and the value of the bonds held by the brokers fell, the fund had to pledge more and more money to maintain the bonds held as collateral.6 By early 1994, when the fund retook possession of the bonds, it had spent more than $9 million to prop up their value, making the deal a net loss.
As losses mounted, the fund became vulnerable to collateral calls from lenders holding the fund's currently losing bonds. Fund managers began to pledge other assets that were likewise in a losing position. Simmerly and the investment department hoped that the bond market would recover, thus enabling the county to meet its obligations under both the leveraged assets and the principal. Unfortunately, the market worsened and the fund resorted to continued leveraging, at one point having leveraged its assets by a three-to-one ratio. In this respect, the SAFE managers acted like compulsive gamblers — continually throwing good money after bad with the thought that their luck would change at any moment.
Despite mounting losses, none of the repurchase agreements were listed on the fund's balance sheet or financial statements. During 1993, SAFE had a total *846 balance of $1.1 billion, but between $300 million and $700 million in leveraged funds were kept off the balance sheets. The accountant with the county auditor's office testified that in December 1993, he specifically asked members of the investment department if there were any outstanding reverse repurchase agreements left off the books and was told all investments were properly accounted for in the balance sheet.
In April 1994, Crain's Cleveland Business, a respected local financial newspaper, published an article questioning the safety of SAFE's core fund in light of the bond market decline. The fund's portfolio showed losses of $90 million at the time.
After the Crain's article went to press, the investment department prepared a "doomsday strategy" to plan for the possibility that the county's coinvestors would "run" on all the assets in the fund. They examined prior audits by independent auditing firms and their own incomplete financial data and determined that SAFE could withstand a total withdrawal of assets.
This assessment was grossly incorrect. The reports from the outside auditing firms were incomplete because they were unaware of the off-balance repurchase investments. Moreover, the investment office's practice of utilizing a cost approach to value its investments rather than their current market value overstated the fund's financial position and lulled the investment department into a false sense of security.
Continued depression in the bond market caused further losses. Members of the investment department began questioning the fund's financial position, particularly its off-balance investments. In response to their inquiries as to whether Gaul was aware of the fund's mounting losses, Simmerly replied that he "took care of it." At the same time, Simmerly began extending the maturities on SAFE's collateral repurchase agreements and borrowed from interest being earned on other losing securities to cover these extensions.
In 1994, members of the public obtained copies of the fund's portfolio under the sunshine laws. After reviewing them, these citizens tipped reporters at the Cleveland Plain Dealer that SAFE was in a precarious financial position. In September, the reporters contacted SAFE officials to set up a meeting to discuss the fund's current status. Both Simmerly and Gaul attended the meeting, at which Simmerly responded to questions focused on the off-balance investment activities. Several witnesses testified that Gaul seemed surprised to hear about the leveraged transactions and the fact that these were kept off the fund's balance sheet.
The Plain Dealer ran its reports on the SAFE program in October 1994. At the time, Gaul was campaigning for the United States House of Representatives. *847 The reports generated a great deal of media attention, leading fund investors to question the safety of their investments. In a meeting with the county commissioners, Gaul informed them of the fund's problems. He relinquished control of the fund to the commissioners, who decided to liquidate the fund in order to prevent its investors from making a "run" on its assets by withdrawing their investments. True to its guarantee, Cuyahoga County repaid all moneys that the other governments and subdivisions deposited. All told, the termination of the SAFE program cost the county $115 million.
Because the indictment failed to specify what "duty expressly imposed by law" Gaul violated, he filed a motion for a bill of particulars. On August 18, 1995, the state responded with a bill of particulars indicating that Gaul failed to perform his "fiduciary responsibilities to preserve and safeguard the financial integrity and soundness in the investments of Cuyahoga County's monies pursuant to Ohio Revised Code
On September 11, 1995, Gaul filed a motion to dismiss the indictment as supplemented by the first bill of particulars and, in the alternative, a motion for a second bill of particulars. The trial court never ruled on these motions. On or about November 1, 1995, the state filed a second bill of particulars of its own accord. This time, the state offered two more theories of liability. It alleged that Gaul "failed to monitor and control" the activities of his deputy treasurers in violation of his duty to that effect as stated in R.C.
On November 17, 1995, Gaul filed another motion to dismiss the indictment as supplemented by the second bill of particulars. First, he argued that the *848 indictment as elaborated by the bills failed to state a criminal offense. Second, he argued that the charge was unconstitutionally vague. The trial court did not rule upon this motion either, so we presume it was denied sub silentio.7
Trial commenced on December 5, 1995. At the close of the state's evidence, Gaul moved for a judgment of acquittal pursuant to Crim.R. 29. The court denied the motion.
In his defense, Gaul claimed that he had no knowledge of the leveraged trading, maintaining that Simmerly knowingly kept these facts from him. To support this theory, the defense relied on various audits performed by independent firms that showed the fund to be healthy, specifically noting that these auditors were also unaware of the off-balance sheet investments.
The jury found Gaul guilty, and the court sentenced him to the maximum penalty allowed by law, ninety days in jail and a $750 fine. Gaul has appealed from this conviction, asserting ten assignments of error. They are:
"I. The trial court erred in failing to dismiss the indictment, as supplemented by the bill of particulars for its failure to state an offense.
"II. The trial court erred in admitting the testimony of Dennis Roche concerning the decision by the Regional Transit Authority not to invest in the SAFE fund.
"III. The trial court committed reversible error in admitting the hearsay testimony of Timothy Simmerly.
"IV. The court erred in failing to grant the defendant's motions for judgment of acquittal.
"V. The court erred in its charge to the jury.
"VI. The court erred in refusing to grant defendant a new trial based on juror misconduct.
"VII. The trial court erred in failing to admonish the jury not to discuss the case prior to deliberations, as is required by Ohio Rev. Code
"VIII. The trial court erred in failing to dismiss the indictment for violating the defendant's right to a speedy trial.
"IX. The trial court erred in failing to dismiss the indictment under the Notice Clause of the Sixth and Fourteenth Amendments to the United States *849
Constitution and the Indictment Clause and the Notice Clause of Article
"X. The trial court erred in sentencing the defendant."
A motion for acquittal should not be granted where the evidence is such that reasonable minds can reach different conclusions as to whether each material element of a crime has been proved beyond a reasonable doubt. State v. Bridgeman
(1978),
R.C.
"No public servant shall recklessly fail to perform a duty expressly imposed by law with respect to his office, or recklessly do any act expressly forbidden by law with respect to his office."
One of the essential elements of the charge is that the accused was under a duty expressly imposed by law. If such a duty can be identified, there must have been evidence showing that Gaul actually violated it for his motion for judgment of acquittal to have been properly denied.
The grand jury issued what can only be described as a vague allegation charging Gaul with violating an undefined duty imposed by an unspecified law. The state filed two bills of particulars setting forth three distinct theories that Gaul violated duties imposed by R.C.
When a statute authorizes performance of a particular act, but does not specify how that act is to be done, the general inference is that the act is to be carried out in a reasonable manner. State ex rel. Atty. Gen. v. Morris (1900),
"[A]ny decision with respect to the investment of moneys of a governmental entity must be made in accordance with the fiduciary standards generally applicable to the investment of public moneys by such entity. See, e.g., State v. Herbert,
The Attorney General stated that, in his opinion, investments made under R.C.
It is arguable that Gaul violated his fiduciary responsibility to preserve and safeguard the financial integrity and soundness of the SAFE fund.9 He should have monitored more closely the investment activities of his deputies.
But a violation of this duty is not a crime. When a public official grossly mismanaged public moneys, the common law held him to be civilly liable for the losses. Again, as explained by the Attorney General in the opinion just quoted:
"It is a well-settled rule in Ohio that a public official is liable for the loss of public moneys, even though illegal or otherwise blameworthy acts on his part were not the proximate cause of the loss of public moneys. State v. Herbert,
"The common law rule of liability for public officials handling public moneys has been codified in R.C.
These fiduciary duties to preserve public moneys cannot serve as the basis of a criminal charge for dereliction of duty under R.C.
"Each county treasurer may appoint one or more deputies, and he shall be liable and accountable for their proceedings and misconduct in office."
We reject the state's assertion that this section may support a charge of criminal dereliction of duty for the same reasons we rejected its first assertion. R.C.
Like the preceding statute, R.C.
Gaul was right in that the state failed to prove that he violated a duty expressly imposed by either R.C.
A close reading of R.C.
"The investing authority shall be responsible for the safekeeping of all documents evidencing a deposit or investment acquired under this section including, but not limited to, safekeeping receipts evidencing securities deposited with a qualified trustee, as provided in section
This section does impose a duty upon the treasurer to "safekeep * * * all documents evidencing a[n] * * * investment." He is also required to "safekee[p] receipts evidencing securities deposited with a qualified trustee" and "documents confirming the purchase of securities under any repurchase agreement." The word "records" simply does not appear. As R.C.
We also note that there was evidence introduced during the trial suggesting that Gaul failed to report the repurchase agreements. They were not listed *854 on the balance sheets shown to federal regulators, potential investors, independent auditors, and the county advisory committee. Likewise, they were not included in the reports to the county auditor, although they seem to have been disclosed in the yearly reports to the state auditor. However, neither the indictment nor the bills of particulars mention a failure to report. Gaul cannot be convicted of a crime for which he was not charged.
Even if the prosecutor had thrown the word "report" into the second bill of particulars, like the word "records" had been, R.C.
The only duty expressly imposed by R.C.
For three reasons, however, we narrowly construe this statute as requiring the treasurer to merely preserve the physical integrity of the documents themselves — to ensure that they are not damaged, lost or destroyed — not as imposing a duty to keep adequate financial records in accordance with accepted accounting principles.
First, the duty is phrased in very precise language. To repeat, the treasurer is not charged with a general duty to "keep records," which arguably could be interpreted to mean that the treasurer's office is to keep an accurate book of all repurchase investments. Instead, the treasurer is required to "safekeep documents evidencing investments." A plain reading of these words compels us to hold that they simply mean what they say — that the treasurer is to keep those documents safe.
Second, even if the language were susceptible of an alternative and more expansive meaning, we could not interpret this phrase any differently. All criminal statutes are to be strictly construed against the state. State v. Hooper *855
(1979),
Third, there is another statute, R.C.
At the close of the state's case, Gaul argued that it failed to prove that he violated the duty to safekeep the documents evidencing SAFE investments. After reviewing the evidence in light of our narrow construction of the treasurer's statutory duty under R.C.
At trial, Dennis Roche, former director of budget and management for Cuyahoga County, testified that he had been hired as a consultant by the county commissioners after the problems with SAFE were exposed. He concluded that the treasurer's office failed to perform sufficient risk analysis of the county's investments. He further testified that from an accounting perspective, the statements submitted to the auditor significantly misrepresented the county's financial position. These shortcomings notwithstanding, Roche explained that during his analysis of SAFE he discovered a large quantity of confirmation documentation. Roche stated that "confirmations are essentially slips of paper that document a purchase or a sale of a security, and there were volumes of confirmation slips."
David Zentkovich, a manager with the accounting firm of Coopers Lybrand LLP, testified that an audit conducted by his firm revealed inadequate accounting procedures in the SAFE fund resulting in insufficient management information to make good investment decisions. However, he further stated that he and his fellow auditors were able to recreate the cash activity but had to "find all the bank accounts that were administered by the treasurer's office, then, in turn, all the transactions that flowed through those, we needed to classify as either purchase and sales, investment income and the like. * * * And with the information that was being asked for and completed by the treasurer's office personnel, we were able to complete [that] schedule and actually pull it together in the form of a double-sided accounting system."
Jeffrey Fountain, Director of Fixed Income Research for Bank One Investment Advisors, testified that in October 1994, he investigated the asset management portfolio of SAFE and concluded that, from an investment management standpoint, the SAFE fund lacked clear asset or liability statements. Therefore, he *856 obtained statements of transactions from National City Bank, at which SAFE held an account, to confirm what the county held. He further explained:
"We went to National City because they were an outside third party where we could gain confirmation on the information that we received from the people in the treasurer's office. * * * I would say that the people in the treasurer's office were fully cooperative and we, at the end of the exploratory process with them, we had a complete picture, but not a confirmed picture."
Chris Krause, a former deputy treasurer in the investment department, testified that he kept an inventory list of all securities held by the county. When one was bought, he would record it on the list and remove the record when the security was sold. Similarly, Marcia Zalokar, another employee of the treasurer's office, testified that she kept records of all repurchase transactions, including a daily inventory kept on leveraged portion of the portfolio, but maintained two separate reports for the core portfolio and the leveraged portfolio.
Charles Emrick, a former investment broker, also testified that the treasurer's office possessed the relevant records and that these were obtainable by the public. Emrick said that he obtained a copy of the SAFE portfolio in July or August 1994 through his brother-in-law, Lee Weingart. When asked how Weingart obtained the portfolio, Emrick responded: "He went and asked the people at SAFE, I believe Tim Simmerly, for the portfolio. And under the sunshine laws in Ohio, they ha[d] to give [it] to him."
All of the evidence presented in the state's case demonstrated that, although the treasurer's office engaged in improper accounting and reporting procedures, the confirmatory documentation was, in fact, preserved. Investigators were able use these documents to reconstruct an accurate picture of the fund's demise. There was no evidence suggesting that Gaul failed to preserve the physical integrity of the documents evidencing SAFE investments. His motion for judgment of acquittal was well taken, and the trial court erred in denying it.
Gaul's fourth assignment of error is sustained.
We will not discuss the other assignments of error because they are moot. App.R. 12(A)(1)(c); 1992 Staff Note to App.R. 12(A).
Judgment reversed.
NADER, J., concurs. *857
HOLMES, J., concurs in judgment only.
ROBERT A. NADER, J., of the Eleventh Appellate District, sitting by assignment.
ROBERT E. HOLMES, J., retired, of the Ohio Supreme Court, sitting by assignment.
Also, they regularly conducted trades on a "corporate" settlement basis, meaning that purchase and sales of securities were not concluded until five days after the buy/sell order. During the interim, the fund managers conducted "pair-off" transactions, where they continued to buy and sell the securities during the settlement period. If interest rates fell, the security held during the settlement period would increase in value, and the gains were recorded in the portfolio. This tactic increases returns in a bull market, but at the risk of losing money if interest rates rise, thereby causing the values of securities held during the settlement period to fall.
"Repos * * * customarily give added protection to the lender [the `purchaser' of the securities] against fluctuation in the value of the collateral, by providing a margin, that is, a spread between the value of the collateral and the amount of the loan. In other words, the lender will usually demand as collateral securities that are worth more than the amount of the loan.
"For repos that last longer than a day, the lender may receive even further protection. `Term repos,' which are those for a definite period longer than a day, and `open' repos, which are indefinite and may be terminated by either party on demand, customarily give the lender a right to demand additional collateral if the value of the original collateral declines significantly. In the event the borrower [the `seller' of the securities] fails to honor such a demand, the lender may unilaterally terminate the agreement, sell the collateral on the open market, and hold the borrower liable for any difference between the amount of the loan plus interest and the recovery from the sale."
"THE COURT: Well, of course, this issue of duty, what is the duty of the treasurer is spelled out in your bills of particulars, isn't that right, counselor?
"MR. RILEY [The prosecutor]: As has been said from the very beginning, the duties that are spelled out are only those that relate to the uniform depositary act and the concomitant duties that relate specifically to the state or at least county treasurer having responsibility for those underlings. But as far as any kind of categorized or catalogued listing of the responsibility of the state treasurer, it was stated by opposing counsel, in fact, the code is silent on that particular issue.
"THE COURT: The code is silent?
"MR. RILEY: On the particular issue of being catalogued in the fashion. There is, in fact, a duty imposed on the treasurer by the uniform depositary act, and I believe by the segment, section that describes the treasurer's responsibilities.
"THE COURT: All right. I'm going to let the case go forward. I'm overruling the motion, and I want the state to define particularly the duty expressly imposed by law * * *."
The state has failed to respond to this request of the trial court, and was unable to articulate the express duty in argument before this court.