UNITED STATES v. MANN

AINSWORTH, Circuit Judge:

This important criminal case involves the validity of an indictment charging misapplication of bank funds in connection with a multimillion dollar loan to a bank official at a preferential rate of interest, conditioned on his bank depositing an equal amount in a non-interest bearing account in the lending bank. The district judge dismissed the indictment for numerous reasons which he assigned. We disagree with those reasons and reverse.

I. The Facts

Robert A. Mann, who is Chairman of the Board of Directors and Chief Executive Officer of the First National Bank of Waco, Texas, and Bank of the Southwest, National Association of Houston, Texas, were jointly charged in a one-count indictment with a violation of 18 U.S.C. § 371 by conspiring during the period from December 1969 until February 1972 to knowingly and willfully misapply the monies and funds of the First National Bank of Waco, with intent to injure and defraud said bank by causing the funds to be converted to the use, benefit and advantage of the defendant, Mann, in violation of 18 U.S.C. § 656. Section 656 provides in pertinent part:

In substance, the indictment charged that defendant Mann was to acquire controlling interest in the First National Bank of Waco for the purchase price of approximately $6,900,000, to be financed by a loan in this amount from defendant Bank of the Southwest. The Republic National Bank of Dallas was to participate in the loan to the extent of $2,900,000, leaving $4,000,000 as the amount of the loan to Mann from Bank of the Southwest. The loan was to be at the rate of interest of 3 per cent per annum, notwithstanding the fact that the prime rate of interest charged by Bank of the Southwest at the time was 8½ per cent. To compensate Bank of the Southwest for extending the loan to Mann at the preferential rate of interest of 3 per cent, Bank of the Southwest was to require Mann to place on deposit with Bank of the Southwest funds of the First National Bank of Waco in an amount commensurate with the principal amount of the loan, i. e., $4,000,000, in a non-interest bearing account until the principal was reduced or paid in full. Thus, according to the indictment, the monies and funds of the First National Bank of Waco were "converted to the use, benefit and advantage of the defendant, Robert A. Mann," and the preferential 3 per cent loan saved Mann approximately $350,000 per year in interest charges.

The indictment further alleged that defendants agreed that if the $4,000,000 principal was reduced but not paid in full, the amount of the non-interest bearing account to be kept by Mann in the Bank of the Southwest would be reduced by an amount commensurate with the reduction in principal. Accordingly, when Mann reduced the principal amount of the loan from $4,000,000 to $3,000,000, the compensating balance of $4,000,000 was also reduced to $3,000,000, and the rate of interest was increased from 3 per cent to 4 per cent, though Bank of Southwest's prime rate at that time was 6 per cent, thus saving Mann $110,000 per year in interest charges.

Finally, the indictment charged that to effect the object of the conspiracy, and in furtherance thereof, certain described overt acts were committed. Since the validity and sufficiency of the indictment are at issue, the full text of the indictment is reproduced in the margin.1

Both defendants filed motions to dismiss the indictment under Rule 12 of the Federal Rules of Criminal Procedure, and a hearing was held on the motions as provided by Rule 12(b)(4) of said rules. Numerous grounds for dismissal were asserted in these motions, especially that the allegations contained in the indictment did not state an offense in violation of any law of the United States, and further that the indictment should be dismissed because prosecution thereunder was in violation of several provisions of the Constitution, especially the ex post facto clause of Section 9 of Article 1 and the due process clause of the Fifth Amendment. Defendants contended, among other things, that the indictment failed to allege an offense because the bank loan was lawful at the time it was made, that the allegations in the indictment were vague and indefinite, that defendants had been denied due process of law because the prosecution resulted in an ex post facto application of criminal statutes, and that the Government was attempting to regulate private business transactions by criminal prosecution.

At the hearing the district court allowed the defendants to introduce into evidence, over strenuous opposition of the Government, a large volume of documentary evidence, much of which came from the files of the Government. The Government's objection was that defendants were attempting to try the general issues of fact at the summary hearing on the motions to dismiss. The district judge agreed, however, with the contentions of defendants and dismissed the indictment for written reasons which he assigned as follows:

This is a FINAL JUDGMENT.

The Government has appealed the dismissal of the indictment under the Criminal Appeals Act, 18 U.S.C. § 3731. At the outset, defendants contend that the appeal is barred by the double jeopardy clause of the Fifth Amendment. They maintain that though the district judge dismissed the indictment, what he actually did in fact was to acquit the defendants upon findings of facts outside the indictment which constituted a defense on the merits. Accordingly, we must initially dispose of that issue prior to any inquiry into the question whether the indictment sufficiently sets forth a violation of a federal criminal statute, or whether defendants have been indicted and prosecuted for unconstitutional reasons requiring dismissal of an otherwise valid indictment.

II. Double Jeopardy

In arguing that the double jeopardy clause prohibits the Government's appeal in this case, defendants rely on United States v. Lewis, 5 Cir., 1974, 492 F.2d 126. In Lewis, the trial court dismissed an indictment after an evidentiary hearing but prior to trial. This Court dismissed the Government's appeal from the district court's ruling and held that "double jeopardy precludes retrial when the district court has ruled in favor of the defendant on facts going to the merits of the case if these facts were adduced at an evidentiary hearing." 492 F.2d at 127. However, the Supreme Court vacated the decision in Lewis, 421 U.S. 943, 95 S.Ct. 1671, 44 L.Ed.2d 97 (1975), and remanded the case for consideration in light of the Court's decision in Serfass v. United States, 420 U.S. 377, 95 S.Ct. 1055, 43 L.Ed.2d 265 (1975). Therefore, the principles enunciated in Serfass are controlling on this issue.

The Supreme Court in Serfass reiterated the principle that jeopardy does not attach until the defendant is "`put to trial before the trier of facts, whether the trier be a jury or a judge.'" 420 U.S. at 391, 95 S.Ct. at 1062, quoting United States v. Jorn, 400 U.S. 470, 479, 91 S.Ct. 547, 554, 27 L.Ed.2d 543 (1971). In Serfass, the district court dismissed the indictment after a pretrial evidentiary hearing. But the defendant had not waived his right to a jury trial, and jeopardy therefore had not attached as a result of an evidentiary hearing before the district court. The Supreme Court noted that "[i]n such circumstances, the District Court was without power to make any determination regarding [the defendant's] guilt or innocence." 420 U.S. at 389, 95 S.Ct. at 1063. "Without risk of determination of guilt, jeopardy does not attach, and neither an appeal nor further prosecution constitutes double jeopardy." 420 U.S. at 391, 95 S.Ct. at 1064. Thus, under Serfass, a pretrial order dismissing an indictment is appealable even when the dismissal is based on facts and evidence outside the indictment. A defendant is not placed in jeopardy merely by a pretrial hearing in the district court, where trial by jury has not been waived, because the trial court is without authority to make any determination regarding guilt or innocence. The decisive inquiry is whether jeopardy had attached at the time an evidentiary hearing was held, and not simply whether such a hearing has taken place.

The evidence received here, over Government objection, was at a hearing under Rule 12(b)(4) on motions to dismiss the indictment, not on the general issue. Defendants not having waived their rights to a trial by jury with the consent of the Government, see Fed.R.Crim.P. 23(a), jeopardy has not yet attached in this case and the Government therefore may properly appeal the order dismissing the indictment.

III. Sufficiency of the Indictment

An indictment is sufficient if it, first, contains the elements of the offense charged and fairly informs the defendants of the charge against which they must defend, and second, enables the defendants adequately to plead an acquittal or conviction in bar of future prosecutions for the same offense. Russell v. United States, 369 U.S. 749, 763-764, 82 S.Ct. 1038, 1047, 8 L.Ed.2d 240 (1962) and cases cited; United States v. Sanchez, 5 Cir., 1975, 508 F.2d 388, 395. Whether the indictment sufficiently alleges a crime is an issue of law, not of fact. United States v. Miller, 5 Cir., 1974, 491 F.2d 638, 647, cert. denied, 419 U.S. 970, 95 S.Ct. 236, 42 L.Ed.2d 186; see Fed.R.Crim.P. 12(b)(1). On review of an order dismissing an indictment, the indictment is to be tested not by the truth of its allegations but "by its sufficiency to charge an offense," United States v. Sampson, 371 U.S. 75, 78-79, 83 S.Ct. 173, 175, 9 L.Ed.2d 136 (1962), since the allegations contained in the indictment must be taken as true. United States v. National Dairy Products Corp., 372 U.S. 29, 33 n. 2, 83 S.Ct. 594, 598 n. 2, 9 L.Ed.2d 561 (1963); Boyce Motor Lines v. United States, 342 U.S. 337, 343 n. 16, 72 S.Ct. 329, 332 n. 16, 96 L.Ed. 367 (1952). A defendant may not properly challenge an indictment, sufficient on its face, on the ground that the allegations are not supported by adequate evidence, for an indictment returned by a legally constituted and unbiased grand jury, if valid on its face, is enough to call for trial of the charge on the merits. Costello v. United States, 350 U.S. 359, 363, 76 S.Ct. 406, 409, 100 L.Ed. 397 (1956).

Defendants continue to maintain here, as they did in the district court, that the indictment is insufficient to allege an offense against the United States. But they erroneously predicate this contention on evidence outside of the indictment which they introduced at the hearing on the motions to dismiss. As we have pointed out above, such evidence is irrelevant to a determination of whether the indictment itself is legally sufficient.

Since the evidence in question has no bearing on the facial validity of the indictment, the district court erred in considering it when deciding whether the indictment alleged a criminal offense. Defendants contend that the evidence conclusively demonstrates that the loan transaction was not entered into "willfully," because it shows that defendants could not have had knowledge that the transaction was prohibited by law at the time it was first made.2 Cf. 1 Devitt & Blackmar, Federal Jury Practice and Instructions § 16.13; 33 F.R.D. 523, 553 (1964). But the Supreme Court has specifically held, in reversing a district court's dismissal of an indictment, that willfullness is an "evidentiary question" that should not be determined in a Rule 12(b) proceeding. United States v. Knox, 396 U.S. 77, 83 n. 7, 90 S.Ct. 363, 367 n. 7, 24 L.Ed.2d 275 (1969); see Universal Milk Bottle Service, Inc. v. United States, 6 Cir., 1951, 188 F.2d 959, 962. As the Eighth Circuit has stated, "There is no authority under Rule 12 . . . to dismiss on the basis of a sufficiency-of-the-evidence defense which raises factual questions embraced in the general issue." United States v. Brown, 8 Cir., 1973, 481 F.2d 1035, 1041 and cases cited.

The essential elements of a substantive violation of 18 U.S.C. § 656 are (1) that the accused was an officer, director, etc. of a bank, (2) that the bank was connected in some capacity with a national or federally insured bank, (3) that the accused willfully misapplied the money, funds, etc. of said bank, and (4) that the accused acted with intent to injure and defraud said bank. Garrett v. United States, 5 Cir., 1968, 396 F.2d 489, 491, cert. denied, 393 U.S. 952, 89 S.Ct. 374, 21 L.Ed.2d 364; United States v. Fortunato, 2 Cir., 1968, 402 F.2d 79, 82, cert. denied, 394 U.S. 933, 89 S.Ct. 1205, 22 L.Ed.2d 463; United States v. Kernodle, M.D.N.Car., 1973, 367 F.Supp. 844, 850; United States v. Vannatta, D.Haw., 1960, 189 F.Supp. 939, 941.3 See also United States v. Bearden, 5 Cir., 1970, 423 F.2d 805, 810-811, cert. denied, 400 U.S. 836, 91 S.Ct. 73, 27 L.Ed.2d 68 (indictment under section 656 sufficient if set out in language of the statute). Since the indictment alleged a conspiracy to commit all the substantive elements constituting a misapplication of bank funds under 18 U.S.C. § 656, it sufficiently alleged a violation of federal criminal statutes.

Other contentions by defendants that the indictment is insufficient are without merit. It is not necessary for the Government to allege that the misapplication was without the knowledge and consent of the First National Bank of Waco or its board of directors, since such consent is a matter of defense. United States v. Klock, 2 Cir., 1954, 210 F.2d 217, 220 (Frank, J.); Mulloney v. United States, 1 Cir., 1935, 79 F.2d 566, 581, cert. denied, 296 U.S. 658, 56 S.Ct. 383, 80 L.Ed. 468. It is not necessary for the Government to allege or prove that the bank actually suffered any loss as a result of defendants' actions. United States v. Rickert, 5 Cir., 1972, 459 F.2d 352, 354; United States v. Acree, 10 Cir., 1972, 466 F.2d 1114, 1118, cert. denied, 410 U.S. 913, 93 S.Ct. 962, 35 L.Ed.2d 278 (1973); United States v. Fortunato, 2 Cir., 1968, 402 F.2d 79, 81, cert. denied, 394 U.S. 933, 89 S.Ct. 1205, 22 L.Ed.2d 463. Nor is it necessary for the Government to allege in the indictment that the bank's funds were converted to the use of the defendants or others, for it is not necessary to set forth the means by which the offense was committed. United States v. Fortunato, supra, 402 F.2d at 82; United States v. Moraites, 3 Cir., 1972, 456 F.2d 435, 440-441, cert. denied, 409 U.S. 891, 93 S.Ct. 109, 34 L.Ed.2d 148. Though it was not necessary to allege conversion, the indictment does allege that the monies and funds of the First National Bank of Waco were "converted to the use, benefit and advantage of the defendant, Robert A. Mann," and thoroughly details how the conversion was accomplished. Conversion is sufficiently alleged in this indictment, though it was not necessary that the indictment do so. Since the term "misapplied" has acquired its own technical meaning, alleging misapplication is sufficient to charge an individual with a crime, see United States v. Wilson, 5 Cir., 1974, 500 F.2d 715, 720; United States v. Moraites, supra, 456 F.2d at 440-441 & n. 9; United States v. Meyer, 5 Cir., 1959, 266 F.2d 747, 754, cert. denied, 361 U.S. 875, 80 S.Ct. 138, 4 L.Ed.2d 113, and an indictment alleging the misapplication of funds is not unconstitutionally vague. See, e. g., United States v. Wilson, supra, 500 F.2d at 720; United States v. Cooper, 10 Cir., 1972, 464 F.2d 648, 651, cert. denied, 409 U.S. 1107, 93 S.Ct. 902, 34 L.Ed.2d 688 (1973); United States v. Fortunato, supra, 402 F.2d at 82.

We are in agreement, therefore, with the recent decision of the Tenth Circuit which held that an indictment alleging the use of an interbank deposit as a compensating balance for a loan at a preferential rate to an official of the depositing bank alleges an offense in violation of 18 U.S.C. § 656. United States v. Brookshire, 10 Cir., 1975, 514 F.2d 786.4 Since the indictment in the present case alleged a conspiracy to misapply bank funds in order to receive a preferential interest rate, the indictment sufficiently alleges an offense.

IV. Dismissal of the Indictment on Constitutional Grounds

Defendants raise numerous challenges to the application of the criminal statute to them under the facts of the case. The first contention that prosecution is barred by the ex post facto clause of the Constitution is without merit. It is settled that the ex post facto to clause is applicable to a law which "makes an action done before the passing of the law, and which was innocent when done, criminal; and punishes such action" or one which "aggravates a crime, or makes it greater than it was, when committed." Calder v. Bull, 3 Dall. (3 U.S.) 386, 390, 1 L.Ed. 648 (1798). The misapplication statute is an old statutory prohibition, enacted in its present form in 1948, see 62 Stat. 729, but having antecedents going back into the 19th Century. See Rev.Stat. 5209, p. 1007 (1873-74); United States v. Britton, 107 U.S. 655, 2 S.Ct. 512, 27 L.Ed. 520 (1883). Inasmuch as the statute and its penalty long predated the present prosecution, the indictment is not prohibited by the ex post facto clause.

Defendants also argue, however, that this prosecution is prohibited because it constitutes an ex post facto application of criminal sanctions and is an unlawful retroactive application of government policy. They contend that there had been no prosecutions of the present nature or specific warning that the conduct under scrutiny in this case was deemed to be criminal prior to the issuance of Banking Circular No. 31 in 1970, by the Comptroller of the Currency, and that the loan agreement in question was consummated prior to the issuance of Circular 31. Circular 31 was sent to the presidents of all national banks on October 22, 1970, at the request of the Justice Department, some ten months after the consummation of the Mann-Bank of the Southwest loan on December 12, 1969. It advised the bank presidents that although there were no cases "at the present time" construing the use of compensating balances to obtain a preferential rate of interest to be a misapplication of funds under the criminal statutes, some such situations might warrant prosecutive action. Additionally, defendants point to a March 21, 1973, letter from Comptroller of the Currency Camp to Assistant Attorney General Petersen in which the Comptroller stated, "It does not appear either possible or fair to charge Mr. Mann or the Bank of the Southwest or the First National Bank of Waco with a willful violation." Moreover, Camp stated, "[I]t appears to me that all parties endeavored to comply in good faith with all governmental requests made upon them and with the law and that it would not be equitable to ask for an indictment based on these facts." Defendants further note that regular bank examinations subsequent to the issuance of Circular 31 gave no indication that the loan in question was considered to be in violation of law. They also point to the fact that when the Deputy Comptroller of the Currency questioned the propriety of the compensating balance and suggested a reduction in the amount of the account, prompt action was taken to reduce the balance on deposit to an appropriate level.5 Additionally, defendants refer to a letter from John C. Keeney, Chief of the Fraud Section of the Department of Justice, to United States Attorney Anthony Farris dated May 4, 1971, in which Keeney stated in part, "Only in an exceptionally aggravated situation occurring before the cut-off date involving substantial loss and where the defense of common practice might be overcome, should prosecution under any theory be considered."6

In Raley v. Ohio, 360 U.S. 423, 79 S.Ct. 1257, 3 L.Ed.2d 1344 (1959), the Court held that a citizen could not be convicted "for exercising a privilege which the State clearly had told him was available to him" or if the government conduct constitutes "active misleading" of a person in order to prosecute him. Id. at 438, 79 S.Ct. at 1266. The Court reiterated the policy of proscribing certain types of prosecutions in United States v. Laub, 385 U.S. 475, 87 S.Ct. 574, 17 L.Ed.2d 526 (1967), where, in affirming the dismissal of an indictment, the Court said, "Ordinarily, citizens may not be punished for actions undertaken in good faith reliance upon authoritative assurance that punishment will not attach." Id. at 487, 87 S.Ct. at 581. The present case, however, differs from the situations in Raley and Laub. Only an allegedly widespread practice of entering into preferential loans of the kind involved here, together with an absence of prior prosecutions, can be said to require dismissal of the indictment under the Raley-Laub rationale. But the Government has never approved the making of loans under the circumstances here, nor has it previously vouched for the propriety of such transactions. However, governmental silence is not "affirmative assurance that punishment will not attach" and a mere absence of prior prosecutions does not constitute "active misleading," and the decisions in Raley and Laub are thus not applicable to the circumstances in this case. As the Tenth Circuit said of the compensating balance practice in United States v. Brookshire, supra, "If, as defendant[s] say, this practice is the usual way in which bankers do business, those who engage in it must suffer the penalty which the law constitutionally provides." 514 F.2d at 790.7

Defendants next contend that the indictment should be dismissed because they were unfairly singled out for prosecution. They assert that the compensating balance practice is widespread, and that prosecuting the defendants herein but not others who have engaged in similar activities constitutes selective prosecution which deprives defendants of equal protection of the law. It is the prerogative of the executive to initiate criminal proceedings, see United States v. Cox, 5 Cir., 1965, 342 F.2d 167 (en banc), cert. denied, 381 U.S. 935, 85 S.Ct. 1767, 14 L.Ed.2d 700; United States v. Raven, 5 Cir., 1974, 500 F.2d 728, 733 & n. 14, cert. denied, 419 U.S. 1124, 95 S.Ct. 809, 42 L.Ed.2d 824 (1975); United States v. Ream, 5 Cir., 1974, 491 F.2d 1243, 1246, and at this pretrial stage of the present case we hold that "the courts are not to interfere with the free exercise of the discretionary powers of the attorneys of the United States in their control over criminal prosecutions." United States v. Cox, supra, at 171. In Newman v. United States, 1967, 127 U.S. App.D.C. 263, 382 F.2d 479, the court held that the decision to prosecute one person rather than another is not reviewable, and that it is not the function of the judiciary to review the exercise of executive discretion in this regard. Id. at 482 (Burger, J.)

Moreover, this Court held in United States v. Raven, supra, a case in which a similar defense was raised, that Raven's argument that his conviction should be set aside because he was singled out as the first subject of a criminal prosecution, despite the presence of numerous other violations of the same criminal statutes by others, was insufficient of itself to require reversal. 500 F.2d at 733.

Defendants' contention that the prosecution here is in bad faith because of selectivity must fall in the face of these authorities and of the undisputed information furnished by the United States relative to the numerous conferences afforded defendants and their counsel at the highest levels of the Attorney General's office prior to presentation of the matter to the Grand Jury.

Defendants further assert that this prosecution contravenes the public policy of the United States by attempting to regulate private business through criminal prosecutions. It is not for the courts to decide whether a criminal prosecution contravenes some vaguely defined "public policy." Indeed, it has been stated that "public policy favors the unencumbered enforcement of criminal laws . . .." United States v. St. Regis Paper Co., 2 Cir., 1966, 355 F.2d 688, 693. If an indictment sufficiently alleges a violation of the laws of the United States, and the prosecution of that indictment is not precluded on constitutional grounds, cf. United States v. Laub, supra; Raley v. Ohio, supra, the courts may not dismiss an indictment on grounds of public policy.

Finally, defendants allege that they are denied due process by being subjected to prosecution in this case. Many of the arguments in support of this contention are not properly before us at this stage of the case. Defendants' argument is, in short, that they are innocent and therefore should not be prosecuted. But guilt or innocence is a decision which may properly be reached only after trial on the merits and not before. Cf. United States v. Brown, 8 Cir., 1973, 481 F.2d 1035, 1041. The indictment was therefore improvidently dismissed and must be reinstated. We emphasize that in reversing the district court and remanding the case for further proceedings, nothing we have said in this opinion is to be construed as intimating any view whatever as to the guilt or innocence of the defendants or as to the case's disposition at trial. We hold only that a Grand Jury having sufficiently alleged in an indictment that defendants conspired to commit a criminal act, and the prosecution not being constitutionally improper, the Government must be given an opportunity to prove its case before the trier of fact.

Reversed.