UNITED STATES OF AMERICA, Plaintiff-Appellant, v. PAUL VAN EYL, Defendant-Appellee.
No. 05-1785
United States Court of Appeals For the Seventh Circuit
ARGUED MAY 8, 2006—DECIDED OCTOBER 2, 2006 AMENDED OCTOBER 5, 2006
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 02 CR 287—James B. Zagel, Judge.
ROVNER, Circuit Judge. Paul Van Eyl went to trial on a twelve-count indictment for various financial crimes. The jury hung on ten of the counts and returned a verdict of guilty on the other two. The district court granted Van Eyl’s subsequent motion for a new trial because the government’s closing argument contained a damaging theory of guilt that the court had earlier excluded in response to a motion in limine. Although the argument was made in good faith, and although the court overruled the defendant’sŒ objection in the heat of the closing arguments, the court
I.
Van Eyl worked for First Merchants Acceptance Corporation (“FMAC”), a finance company specializing in the subprime auto lending market. Van Eyl served as vice president for strategic planning and risk management. Mitchell Kahn, a lawyer who co-founded FMAC and served as its chief executive officer, was Van Eyl’s co-defendant. Kahn pled guilty and cooperated with the government in its prosecution of Van Eyl. FMAC was in the business of lending money at above-market interest rates to pеople with problematic credit histories so that they could purchase cars. The company’s primary asset was its accounts receivable, which FMAC used to secure a line of credit with LaSalle Bank, the company’s primary source of funds. Given the nature of FMAC’s business, not all of the customer accounts were current at any given time, with some customers being so late in their payments that their accounts were charged off as a loss. Because of delinquent accounts, two important aspects of FMAC’s business were collections and repossessions. Accounts receivable were tracked by a computer system called Norwest, which wаs run by an outside contractor. The Norwest system grouped delinquent accounts into thirty-day increments (called “buckets” in the system) depending on how late the customers were in paying. For example, the thirty-day bucket contained accounts that were thirty-one to sixty days late in payment, the sixty-day bucket was comprised of accounts that were sixty-one to ninety days late, and the ninety-day
Van Eyl interacted with a number of other FMAC employees in the course of his job. Julie Freisinger was FMAC’s liaison to the contractor that ran the Norwest system. Tom Ehmann was the chief financial officer, Brian Hausman (who co-founded the company with Kahn) was in charge of operations, and Peter Gorman was a specialist in collections. Van Eyl also worked closely with Kahn. Part of Van Eyl’s job was to compile data from Norwest and keep track of delinquent accounts and charge-off rates on a monthly basis, and to use that data to project future charge-offs on an annualized basis. Van Eyl regularly submitted this information to Kahn. Some of this information was reported in FMAC’s SEC filings and was also used in presentations to investment bankers to promote investment in FMAC. The charge-off rate was a very important number to
Early in 1996, senior management responsible for reviewing this data noticed that the charge-off rate was steаdily climbing. The norm in the industry was 6-8% and FMAC was charging off 9-10% of its loans. Collection efforts, directed by Gorman, were slipping and delinquency rates were rising. Van Eyl conceded at trial the events that ensued from the rising delinquencies but vigorously contested the issue of his involvement and intent in these events. According to the government, Ehmann suggested to Kahn that in order to hide FMAC’s problems, they should manipulate FMAC’s financial reporting. At first, Kahn and Ehmann tried keeping the books open, that is, posting payments received in one month to the previous month in order to minimize the delinquency rate for the previous month. They soon realized that this practice merely delayed the inevitable. Kahn then apрroached Van Eyl about manipulating the accounting. Kahn, Ehmann and Van Eyl discussed several strategies and decided to postpone charging off accounts that were more than ninety-one days overdue, to grant deferrals on some accounts and to treat “skips” as if they were “repos.” “Skips” were delinquent accounts where neither the customer nor the car could be located. FMAC’s policy was to charge-off as a loss the entire balance of these accounts. “Repos,” shorthand for repossessions, were delinquent accounts where the car could be located, recovered and re-sold. Repossessions typically resulted in recovery of approximately 55% of the remaining balance of an account, and for this reason, FMAC’s policy was to charge-off as a loss 45% of the balance on a repossession. Treating a “skip” as if it were a repossession on the company books meant that only 45% rather than 100% of the balance was written off as a loss even though the remaining 55% was virtually uncollectible. In order to
According to the government, this practice continued from June 1996 through January 1997. During that time, Kahn, Ehmann and Van Eyl represented publicly that accounts more than ninety-one days delinquent were being charged off. Nonetheless, delinquencies continued to rise and Kahn discussed new strategies with Van Eyl. Out оf these discussions came the customer service deferral program. A deferral was an agreement between FMAC and the borrower to defer a monthly payment to the end of the loan period. Deferrals are a legitimate practice in the lending business, typically used to assist borrowers through a brief period of money trouble without having the account reported as delinquent. FMAC’s original informal policy was to grant deferrals for good cause, but FMAC’s lenders placed limits on the practice. Accounts that received three one-month deferrals over the life of the loan or two deferrals in a single year could no longer serve as cоllateral. Accounts that were more than ninety days delinquent were not eligible for deferral. In its short existence, the customer service program accorded deferrals to approximately 9,300 ineligible accounts with balances totaling more than $109 million.
In March 1997, Ehmann, the CFO, was replaced by Norman Smagley. Soon thereafter, Brian Hake, FMAC’s treasurer, told Smagley that the high number of deferrals granted in 1996 violated FMAC’s agreements with outside
Van Eyl had a completely different view of these events. According to Van Eyl, FMAC’s ninety-one day charge-off policy was very conservative by industry standards. That policy was changed to 121 days in late 1996, and this change was fully disclosed to FMAC’s outside auditors and was revealed in SEC filings. Van Eyl believed that the rising delinquency rates were more related to poor efforts in the collections area than to the quality of FMAC’s loan portfolio. Of the many possible solutions to these problems, the customer service program was selected to remedy some of the problems created by poor collection efforts. Van Eyl, who was in his late twenties at the time of these events and who had no prior experience in the industry, believed Kahn when he assured Van Eyl that the changes made were legitimate business practices that had been cleared with the board of direсtors and with the company’s lenders. Although the government portrayed the customer service program as a sham, Van Eyl’s theory of defense was that there were ample reasons for Van Eyl and others to believe that the program was a legitimate and appropriate means to address the collections problems. According to Van Eyl, the customer service program was
At trial, Kahn testified against Van Eyl, claiming that he discussed with Van Eyl hiding the fact that delinquency rates were rising along with charge-off rates. Kahn admitted that he made the decision to manipulate the financial data but that Van Eyl had operational control over charge-offs with the help of Steve Zemaitis, an FMAC analyst who reported to Van Eyl, and Freisinger. Gorman testified that he told Van Eyl that the customer service program did not make sense to him and that he thought “somebody is going to have some issues at the Securities and Exchange Commission, is going to have issues with this and in my mind somebody is going to go to jail for this.” Tr. at 1941. Gorman testified that Van Eyl’s response to this was that the program was a common and acceptable practice in the industry. According to Gorman, at the end of this сonversation, Van Eyl went down the hallway to Kahn’s office. Tr. at 1942.
Before trial, Van Eyl moved in limine to exclude lay opinion testimony or evidence on issues of law or conclusions of fraud. Van Eyl was concerned that many of the government’s lay witnesses would express opinions about the “fraudulent” or “improper” nature of Van Eyl’s conduct and the customer service program, or offer opinions about his intent. In reviewing FBI reports produced by the government, Van Eyl cited many statements by witnesses that he believed crossed this line. For example, Zemaitis told investigators that some of the financial scenarios Zemaitis created and gave to Kahn and Van Eyl were “clearly improper treatments of the accounts,” and that “the most egregious fraudulent activity that took place” involved the deferrals granted in December 1996. Zemaitis also opined that Kahn and Van Eyl “were attempting to manipulate the charge-off statistics” presented to the board
The district court noted that, in some lay witness testimony, there is a fine line between fact and opinion. Tr. at 3.
During the trial, defense counsel objected each time the prosecutor crossed the line of the in limine ruling. The court sustained an objection to the prosecutor asking Zemaitis, “Do you need to be a CPA to tell the difference between the truth and a lie?” Tr. at 442. The prosecutor also attempted to elicit testimony from Freisinger that she lost a great deal of weight during this time period because of the long hours she was working and because shе had anxiety that what she was doing was not right. Tr. at 732-25. The court sustained defense counsel’s objection to this line of questioning, allowing the witness to testify only that she lost weight due to her long hours. Tr. at 734-35. The court allowed this
In closing argument, the defense argued that the government failed to prove that Van Eyl acted with the intent to defraud. Specifically, defense counsel argued that the evidence supported a finding of good faith becаuse the customer service program was not hidden but was well known throughout the company, that criteria were developed for the program and a task force was assigned to implement it, that the program was successful in returning defaulted borrowers to regular payment schedules, and that Van Eyl had been assured by Kahn that the board of directors and the company’s lenders knew about and approved the program. Moreover, the large number of deferrals in the fall of 1996 had been voluntarily disclosed in the company’s SEC filings and to FMAC’s bank group well before allegations of misconduct surfaced.
In rebuttal, the prosecutor attempted to utilize the opinions of lay witnesses about the fraudulent nature of the conduct in order to demonstrate Van Eyl’s intent. The prosecutor stated that Zemaitis “could recognize right from
[T]hey could tell what any reasonable person can tell, with or without a college education. They could tell what Peter Gorman could tell, what Rich Zielinski could tell, what Norman Smagley could tell, what Steve Zemaitis could tell. They could tell that this was a fraud. There is no valid business reason for doing this.
Tr. at 126.
II.
On appeal, the government argues that the rebuttal argument did not violate the court’s in limine ruling, that the argument drew fair inferences from admissible evidence, that the rebuttal was invited by Van Eyl’s closing argument, and that any error was harmless. The government also contends that Van Eyl did not adequately preserve his objection to most of the comments and that we should review the district court’s ruling during closing argument for plain error. Under the plain error standard, the government continues, a new trial should not have been granted unless the defendant probably would not have been convicted but for the alleged error. Because this is not the standard the district court applied in granting the new trial, the government urges us to find that the court erred, and asks that we reinstate the verdicts on Counts I and III.
A.
The government argues that Van Eyl forfeited his objections to most of the government’s rebuttal argument by not continuing to object after the district court overruled the first objection to this line of argument. The district court disagreed:
When the prosecutor violated that in limine ruling during closing argument, I overruled the objection. While the objection was not as full as it should have been, not as sufficient as it could have been, and perhaps deficient in giving me all the information I needed, I am reluctant to find waiver because I did understand the objection to refer to the form of argument that was being made. I overruled it, I recall, because I thought the door had been opened by the defense argument and, more importantly, because I thought the focus of the argument would be on the testimony of Peter Gorman.
United States v. Van Eyl, Case No. 02 CR 287, Memorandum Opinion and Order, at 5 (N. D. Ill. July 13, 2004) (hereafter “Memorandum Opinion”). The government concedes that, at worst, this failure to continue objecting would be a forfeiture rather than a waiver, and contends that we should therefore review the issue for plain error only. Van Eyl cоrrectly points out that the purpose of the rule on forfeitures is to give the district court the first opportunity to correct any errors that might arise. United States v. Rogers, 382 F.3d 648, 650 (7th Cir. 2004). The district court understood Van Eyl’s objection to be to the entire line of argument and thus no purpose would have been served by forcing Van Eyl’s lawyer to continue to object. The objection was thus adequately preserved. Moreover, Van Eyl had raised the issue in a motion in limine and the district court’s ruling on that motion was definitive, not provisional or tentative in any way. See Wilson v. Williams, 182 F.3d 562, 563 (7th Cir. 1999) (en banc) (once an in limine ruling is definitive, the function of the objection requirement has been served and no further objection need be made at trial). By any standard, the issue was preserved.
On the defendant’s motion, a district court may grant a new trial “if the interest of justice so requires.”
B.
The government first contends that the rebuttal argument did not violate the court’s in limine ruling. The government argues that Van Eyl’s motion sought only to bar opinion testimony by lay witnesses on the legality of Van Eyl’s
The district court noted that its ruling should not be interpreted as a judgment that the prosecutor violated any standards of professional ethics, characterizing the rebuttal errors as “honest mistakes made in good faith by a lawyer who hаs in his appearances . . . demonstrated a high standard of professional ethics and a sense of fairness toward opposing parties.” Memorandum Opinion at 10-11 n.3. We echo that sentiment; there is certainly nothing in the record to indicate otherwise and on this matter we defer to the trial judge. That said, none of these scattershot arguments hit the mark. The difference between offering testimony for the truth of the matter asserted and offering it to demonstrate why a person took a particular action is a subtle distinction that might be lost on jurors, but that was all the more reason to keep the lines clear, not a reason to cross or blur the line. Nor is there any lоgic to a contention that the court meant to allow in the rebuttal argument what it found unfairly prejudicial in testimony. The court
The government also argues that the argument was invited by Van Eyl’s closing argument. Indeed, when the court ruled on Van Eyl’s objection to the government’s rebuttal, the court believed that Van Eyl’s lawyer had “opened the door.” After further reflection, the district court changed course:
After further consideration, however, I think the door had not been opened. Substantially, the focus of the defense argument was not that others thought everything was all right; rather, the focus was that Van Eyl was not told it was wrong. The prosecution was not forced to make the argument it did in rebuttal.
C.
Finally, the district court found that the error prejudiced Van Eyl enough to warrant a new trial. The government argues that Van Eyl was not prejudiced, and that any error was harmless. The government again urges us to use the plain error standard. Under that standard, the government maintains that Van Eyl is not entitled to a new triаl unless he probably would not have been convicted but for the error. As we explained above, plain error review is inappropriate here because Van Eyl properly preserved his objection. The applicable standard for the prejudice finding is whether there is a reasonable possibility that a trial error had a prejudicial effect upon the jury’s verdict. Berry, 92 F.3d at 600. The district court determined that it did. In particular, the district court noted that Van Eyl never disputed what happened at FMAC; rather, his defense was that the government did not prove that he possessed the intent to defraud. The prosecutor’s argument in rebuttal amounted to “if everyone еlse could see a fraud, then Van Eyl saw it too.” Memorandum Opinion, at 4. The court commented, “The prosecutor should not have made this argument. It was powerful and persuasive, and it is impossible for me to
AFFIRMED.
UNITED STATES OF AMERICA, Plaintiff-Appellant, v. PAUL VAN EYL, Defendant-Appellee.
No. 05-1785
United States Court of Appeals For the Seventh Circuit
BAUER, Circuit Judge, concurring. I submit a reluctant concurrence. I believe, overall, the defendant received a fair trial and the verdict was amply supported by the evidence. And, in a case like this, opinion evidence of accounting practices and procedures, and how legitimate business differs from illegal or fraudulent business practices, almost
Nevertheless, the opinion of the majority is quite correct: Our standard of review over the decision of the district court to grant a new trial is exceedingly deferential. I emphasize that the prosecutor was not to blame and, had the trial court denied the motion for a new trial, a guilty verdict would have been easy to sustain.
A true Copy:
Teste:
Clerk of the United States Court of Appeals for the Seventh Circuit