Opinion
Criminal No. 95-386 (DRD).
February 11, 2004
HARRY ANDUZE MONTAÑO, San Juan, PR.
R.J. Cinquegrana, Esq., Choate, Hall Stewart, Boston, Massachusetts.
JORGEL ARROYO ALEJANDRO San Juan, PR, Counsel for Defendant Lorenzo Muñoz Franco.
SENTENCING OPINION AND ORDER
At the end of the hearing held on December 19, 2003, after the testimony of José B. Cantalapiedra, the former President of Banco Santander, the institution that acquired the assets of Caguas Central Federal Savings and Loan, the United States Assistant Attorney, María L. Domínguez Victoriano, announced that the United States would not be relying on the theory of "actual losses" but on the theory of "intended losses," all under U.S.S.G. 2F1.1. The court determined that co-defendants had suffered no real prejudice by a change in theory since most of the evidence as to losses had entered into the record during the trial phase of the case; further the United States had the option under the guidelines to proceed "under actual or intended loss to the victim whichever is greater." United States v. Edwards, 303 F.3d 606, 645 (5th Cir. 2002); United States v. González-Alvarez, 277 F.3d 77 (1st Cir. 2003). (See Docket No. 1477.)
The written charge of the court contained at Docket No. 1278, clearly instructed the jury not to concern itself with the value of the loss. For the purposes of this Order the court presumes a reading of that portion of the charge to the jury.
The court, however, granted the defendants a continuance enabling them to express their position to the United States Submission of Corrected Motion of Intended Loss, (Docket No. 1466), and Corrected Motion on Intended Loss for Sentencing Purposes, (Docket No. 1467). An initial continuance was granted because of the extended Christmas holidays until January 7, 2004; finally because of unavailability of some of the counsel of defendants sentencing was resumed on February 4th, 5th, and 6th of 2004. (See Dockets No. 1482 and 1485.) The defendants had plenty of time to object to the submittal of intended loss filed by the United States. Co-defendants did in fact react to the submittal of the United States: Ariel Gutierrez, (Docket No. 1479); Dr. Francisco Sánchez-Aran, (Docket No. 1478); Dr. Francisco Sánchez-Aran's Response to Government's Filings Outlining Unauthorized Financial Transactions, (Docket No. 1469); Lorenzo Muñoz Franco's Objection to the Government's Motion on Intended Loss and Motion for New Trial, (Docket No. 1468); defendant Ariel Gutierrez' Motion for New Trial Based on Newly Discovered Evidence, (Docket No. 1487). The court shall abstain from ruling on the Motion for New Trial until certain pertinent testimony is transcribed.
The court is concerned about an argument raised by co-counsel for co-defendant Lorenz Muñoz Franco, Counsel R.J. Cinquegrana based on the case of United States v. Schneider, 930 F.2d 555, 558 (7th Cir. 1991). The case of United States v. Schneider, supra, was adopted by the First Circuit in the case of United States v. Haggert, 980 F.2d 8, 12 (1st Cir. 1992), describing the two types of fraudulent conduct:
The first type of fraud implicates the "true con artist," who never intends to perform the undertaking, such as the terms of the contract or loan repayments, but who intends only to pocket the money without rendering any service in return. The second type of fraud involves a person who would not have attained the contract or loan but for the fraud, but who fully intends to perform. In the latter case, and only in the latter case, is the intended loss not to be considered for sentencing. (Emphasis ours.)
See also United States v. Blastos, 258 F.3d 25, 30 (1st Cir. 2001).
Co-defendant alleges basically that the United States cannot return to "intended loss" because the President of the Bank and Chief Executive Officer, Lorenzo Muñoz Franco, did not intend to do harm to the loan and wanted the loans to co-defendant Gutierrez (Modules' loans) as well as the loans to Mirandez to work and be paid. Co-defendant Gutierrez joins alleging that the Modules loans, and the loans to other construction developers utilizing modules as the subcontractors all had intent to comply with payment with the loans provided by Caguas Federal. Hence, the second type of fraud described above, the culpable fraudulent party that "fully intends to perform . . ." "the intended loss [calculous] cannot be considered for sentencing."
The court starts the analysis reminding the parties that only intent to deceive is necessary and not intent to harm the bank in bank fraud cases. United States v. Kescrick, 221 F.3d 19, 26-29 (1st Cir. 2000 — en banc), cert. denied Ober v. United States, 531 U.S. 961, 121 S. Ct. 387 (2000) ([t]he intent necessary for a bank fraud conviction is an intent to deceive the bank in order to obtain for it money or other property. Intent to harm is not required . . ."
The court in the Opinion and Order entered on February 6, 2003, disposing of all then filed Rule 29 Motions, (Docket No. 1339), provided various examples of attempts to deceive the Board of Directors regulators and the government regulators carried on by co-defendants Muñoz-Franco and Sánchez-Aran. Further, the court provided various examples of preferential treatment provided which clearly denoted the conduct co-defendants Muñoz-Franco and Sánchez-Aran of intent to deceive. Said conduct by co-defendants Muñoz-Franco/Sánchez-Aran leads to the conclusion under the standard now required of preponderance of evidence that the two co-defendants knew that the loan scheme would not work in the short and long run.
The court relates but a few examples:
1. Modules was not fulfilling its obligation to build units for those construction projects financed.
2. Modules was being paid for work which had not been completed (construction certifications paid that were not earned by completed work).
3. Modules was repaying prior unrelated loans for Caguas Central solely from new construction project loans earned by Caguas Central. The payment of prior loans (principal and interest) considerably weakened the ability to comply with the loan object of the loan. Consequently, there was no budget to fulfill construction requirements.
4. Loans were disbursed prior to approval of loans and/or prior to date of execution of the loan.
5. Loans were disbursed without Board's approval.
6. Loans were disbursed ahead of Board's approval (the Board subsequently was not advised of the advance).
7. Units were not delivered pursuant to the contract.
8. Nominee loans established to camouflage loans to Modules.
9. Large amounts of overdraft checks were paid relating to Modules accounts.
10. Developers were sought and granted loans only if Modules were used as the subcontractor. Later the loans were subject to payments to Modules without approval or knowledge of the developer borrower of the loans. (See Docket No. 1339, p. 13-15.)
11. Years passed (1984-1986) and Modules did not pay any principal or interest to construction loans except by taking moneys from other construction loans. (This was not advised to the Board.)
As to all facts stated at § 1, §§ 11 of this page, see generally Docket No. 1339, p. 5-8.
As to the government auditors and regulators Muñoz and Sánchez-Aran incurred in the following conduct:
1. ". . . We hereby ratify that this board was fully informed in detail by management of all matters pertaining to the bank's involvement with Modules and related companies before granting all loans." (Docket No. 186, p. 2-3.) The statement is false since the Board was not informed that moneys were used to pay principal and interest in other loans thereby weaking the loan approved by the Board dooming the construction project to failure by lack of financing.
2. "This Board of Director wishes to states in unclear and uncertain terms that it has never considered and much less approved any policy or practice of permitting borrowers to use construction loan proceeds to satisfy or make interest payments on other unrelated loans." This statement is false and notwithstanding counsel gallant effort to make all loans related, this court does not consider a loan related unless a contemporary document related the loans and specifically authorized the disbursement. Under counsel's theory all loans are related merely because the loaned entities are related. Further, the loans considered by the court were not provided as "work out loans" and do not even mention prior loans in any of the loan documents.
When there was collateralization of a loan with another loan even expressed on another document the court considered the loan related.
3. Jardines de Villa Alba, Inc. — "It is management's opinion that the value of the fully developed land plus the units which are already in place in the project are enough to pay of the indebtedness of the bank upon completion." This constitutes a gross misstatement. The statement is a cover up for in excess of twenty loans that were paid to Modules notwithstanding that only one house was actually built on the project. Allegedly the Modules were constructed at the factory but even the foundations were disbursed. The court examined photographic evidence, (Ex. 189), clearly showing that the housing project except for one house was not built. Further, paying the Modules at the factory but not installed at the project and paying foundations not at the building site constitutes a windfall for Modules and against the bank. Notwithstanding, as part of the statement it is affirmed that units are "already in place" in the project is a further gross misrepresentation since there was only one unit in place and not in excess of twenty as was inferred.
4. The regulators were not disclosed certifications for work not completed.
5. The regulators/auditors were not disclosed payments from one loan to another disguising a loan as a performing loan when said loan was in reality an outstanding loan which was reportable.
Although counsel insist that all Modules loans were "related loans," the court clearly recalls auditor González distinctly stating, as unrebutted evidence, that Muñoz and Sánchez-Aran admitted to the practice when confronted by González. See Opinion and Order (R. 29), Docket No. 1339, p. 12.
6. Income from Modules and Mirandez's loans were fictitiously carried as performing loans; this practice was inappropriate as it constituted unearned income reportable to the auditors.
7. Construction deficiencies in the projects were not duly reported to the auditors.
The statements of § 1-6 stated at p. 5-6 of this Order, are expressed in Docket 1339, p. 10-12.
The described conduct by both co-defendants Muñoz and Sánchez-Aran constitued a well-developed scheme to disguise the true economic state of Modules and Mirandez's loans. The conduct was a sophisticated kiting like scheme using construction loans instead of checks. It was obvious to a banker that the scheme was to eventually flounder as it did fail. This conduct leads to the inescapable conclusion that the loans were not to be repaid since the plan started with moneys derailed from one loan to another causing the predictable collapse of the projects. The conduct even sought authority from the Board for a project wherein the Board ignored that the then authorized project could not be timely started on the site because the site was precisely occupied by the Module manufactory plant. Notwithstanding, payments were approved and no construction was built yet Modules was paid in full. Finally, the deception to the regulators further constitutes evidence that the loans were intended not to be complied.
The Board upon initial granting of the loan for La Marina Project (Dow phase) ignored that eighty-five units could not be timely built because the Modules Plant was located on the site of construction of the housing project to be built.
As to co-defendant Ariel Gutierrez, the non compliance intent can be determined by the fact that moving moneys from one loan to another clearly dooms to failure the project since the ultimate result simply means that the project lacks economic viability to be constructed. These loans were not "work out loans" because when the moneys were taken out, the construction budget that remained was then insufficient to comply. Further, the history of lack of building compliance, unwarranted payment of certifications, unwarranted advances, unapproved Board loans, together with history of failure in payment of loans constitute circumstantial evidence of intent not to comply. Hence, the court offers no resistance to the legal theory of the United States v. Schneider, 930 F. 2d at 558 and the adoption of that theory by the ruling Court of Appeals at United States v. Haggert, 980 F.2d at 12, as also followed in United States v. Blastos, 258 F. 3d at 30. However, the shoe does not fit because the theory lacks factual underpinnings. Hence, the court may use "intended loss" because there is plenty of evidence under the preponderance of evidence standard to justify that the affected co-defendants did not intent the loans to perform.
II. THE INTENDED LOSS — THE GUTIERREZ'S LOANS
"In loss application cases the loss is the actual loss to the victim . . . However, when the intended loss is greater than the actual loss, the intended loss is to be used U.S.S.G. § 2F 1.1." Further, "intended losses need not to be determined with precision: [T]he court needs only make a reasonable estimate of the loss, given the available information." United States v. Stein, 23 F.3d 6, 18 (1st Cir.) cert. denied 532 U.S. 943, 121 S. Ct. 1406, (200). See also United States v. Blastos, 258 F.3d at 30. An intended loss calculous should pass muster "where there is good evidence of actual intent and some prospect of success." United States v. Rabbio, 186 F.3d 37, 44 (1st Cir.), cert. denied 528 U.S. 1056, 120 S. Ct. 602 (1999).
Said policy statement read in 1987 as follows: "In keeping with the commission's policy on attempts, if a probable or intended loss that the defendant was attempting to inflict can be determined, that figure will be used if it was longer than the actual loss." 1987 U.S.S.G. 2F 1.1 n. 7. The court may use new application notes if they are "clarifying rather than substantive" in nature. Se U.S.S.G. 1B1.11. See also Stinson v. United States, 503 U.S. 39, 39-40' 113 S. Ct. 1913, 1915 (1993) followed in the case of United States v. Bennett, 37 F.3d 687, 695 (1st Cir. 1994).
The court finds particularly applicable to the instant case the factual scenario and holding in the case of United States v. Stedman, 69 F.3d 737 (5th Cir. 1995), cert. denied 517 U.S. 1250, 116 S. Ct. 2511; rehearing denied 519 U.S. 912, 117 S. Ct. 280 (1996). This case involved the Chief Executive Officer Joseph Stedman and Gary Gordon, the President of Lone Star National Bank in Dallas, Texas. The bank was "heavily involved in real estate loans" as was Caguas Central in the instant case. United States v. Stedman, 69 F.3d 739. The bank deteriorated financially in six years and was closed in 1990. The accounts were all insured by the FDIC. The government introduced evidence that Stedman in an effort to disguise the regulators "ordered employees to remove from loan files documents that would have affected adversely an ailing loan . . . Gordon . . . was present when the documents were removed and knew about the scheme." The idea was "to make the loans appear healthier to the regulators." United States v. Stedman, 69 F.3d 739. As a consequence of the scheme of Stedman and Gordon, the bank "avoided unwelcome decreases in capital because the regulators did not require it to increase its loan loss reserves, which would have been the likely result had [the regulators] not been denied access to the negative borrower information. By this scheme Lone Star assets were fraudulently made to look better than they were." United States v. Stedman, 69 F.3d 739. The court deems that in the instant case the facts are striking similarly. The scheme at Caguas Central Federal Savings and Lone Star had the same purpose, concealing from the regulators, then the Comptroller of the Currency (OCC) and the FDIC from performing reliable audits: "By concealing information that reflected negatively on the loans, the defendants gave them a misleading picture of the bank's financial health . . ." United States v. Stedman, 69 F.3d 739.
The loans at Lone Star only involved 8.1 million dollars. In the instant case the loans add up to considerable more money.
In the instant case as depicted in the court's Opinion and Order at Docket No. 1339, the regulators were also misled as to the construction loans at Caguas. Loans were depicted as performing loans because the regulators were not advised as to payments on principal and interest emanating from other loans. Further income on the non performing loans was inappropriately created and reserves were avoided all to provide a fictitious construction loan scenario. In the instant case since the liability created was larger — the bank operations created had to be more sophisticated: Larger amounts of overdrafts were paid to Modules; a kiting scheme was created with Modules construction loans, one following another; other developers were sought but they had to utilize the debtor in economic trouble (Modules) enabling moneys to be funneled by the bank to the troubled debtor; unapproved Board of Directors loans were extended; moneys were disbursed without construction performance.
In United States v. Stedman, 69 F.3d at 740, the PSR "aggregated the bank losses for each of the loans in association for which Stedman and Gordon hid information, "the resulting loss from each loan was imputed. United States v. Stedman, 69 F.3d at 740, n. 1. Stedman and Gordon urged the sentencing court "to hold that the sentencing loss amount should be only the part of the loss for which their illegal conduct was the cause" but not for the resulting loss. The court held that "realistically no one can assess such a thing precisely; and we refuse to ask sentencing courts to undertake such Herculean task or to ask sentencing courts to afford the benefit of the doubt to bank officers who engage in wrongful conduct." United States v. Stedman, 69 F.3d at 740-741. The court concluded "In short we refuse to interpret the guidelines to allow the parties who choose to commit complex or complicated bank crimes to receive a windfall simply because of the very complexity of those crimes." United States v. Stedman, 69 F.3d at 737. The court rejected the argument advanced by Stedman and Gordon: "Accordingly they [Stedman and Gordon] conclude that the sentencing court must determine the loss amount for which their wrongful conduct was the sole cause and use only that amount in sentencing. As herein discussed, we refuse to so interpret the guidelines."
This court finds reasonable and will follow the holding of United States v. Stedman, 69 F.3d 737. Fraudulent loan tampering will not receive from the court a safe haven for bank officers incurring in fraud since "this type of bank fraud is more likely to occur with respect to unhealthy loans or during financial hard times." United States v. Stedman, 69 F.3d 737.
The court deems that the economic theory of intended loss expressed under United States v. Stedman, 69 F.3d at 738-741, is not "economically irrational." United States v. Orlando Figueroa, 229 F.3d 23, 48 (1st Cir. 2000) citing United States v. Schneider, 930 F.2d at 558-559. Hence, those that incur in fraudulently tampering in loan records, hiding pertinent information from the regulators and/or incurring in other fraudulent conduct related to bank loans shall be assessed as "intended loss," the loss resulting from the loans. This is the basic teaching of United States v. Stedman, 69 F.3d at 741. "In sum, the guidelines are adequately flexible to allow the sentencing court to hold these defendants responsible for the entire (resulting) loss as associated with these loans."
INTENDED LOSS — GUTIERREZ'S LOANS
For the reference of the readers the court has prepared various exhibits to this opinion of the nonperforming authorized loans and unauthorized loans of co-defendant Ariel Gutierrez setting forth the intended losses attributed to co-defedant Gutierrez and losses attributed to co-defendants Muñoz/Sánchez. The court provides at least partially the evidentiary source. Loans related to Gutierrez are marked Ex. I-A (La Marina), l(b) Levittown, I(c) Quintas de Country Club, I(d) Jardines de Villa Alba, I(e) Los Caciques, I(f) Los Mameyes, I(g) Cerrovista Project.
The intended loss is concluded as follows:
Co-defendant Co-defendants Muñoz/ Gutierrez Sánchez-Aran
La Marina I(a) $717,000.00 1.100,000 million Levittown I(b) $860,000.00 3.100,000 million Quintas de Country Club I(c) $274,000.00 2.900,000 million Jardines de Villa Alba I(d) $297,000.00 297,000.00 Los Caciques I(e) $1,868,000.00 1,868,000.00 Los Mameyes I(f) $2,800,000.00 2,800.000.00 Cerrovista I(g) $1,841,177.00 1,841,177.00 _____________ ______________ TOTAL: $8,657,177.00 $13,906,177.00
The court following United States v. Stedman, 69 F.3d 737, first considers the wrongful fraudulent conduct of each defendant, i.e. an unauthorized Board loan, a wrongful certification payment, illegal advances, moneys transferred to pay principal and interest of other loans without Board's approval, moneys disbursed without Board's authorization, etc. The co-defendant is then charged with the amount of the resulting failure of the loan (not the entire original amount of the loan unless the entire amount is a subsequent failure). United States v. Stedman, 69 F.3d at 739-740. Further, there is substantial evidence complying with the preponderance of evidence standard that the regulators were deceived "Stedman and Gordon [similar to Muñoz/Sánchez-Aran] exposed the bank to the possibility of loss for the entire loan amount when they chose to impede regulators from considering information that could have led them to intercede to protect the bank," United States v. Stedman, 69 F.3d at 741.
The court adds an appropriate caveat, that a victim's negligence to properly mitigate and/or the negligence of intervening actors "does not prevent attributing to the defendants the full amount of the loss." United States v. Berkowitz, 92 F.2d 1376, 1390 (7th Cir.), cert. denied 502 U.S. 845, 112 S. Ct. 141 (1991); United States v. William E. Miller, 962 F.2d 739, 744 (7th Cir. 1992); further, "the existence of intervening causes does not provide for a basis for reducing the amount of loss under Section 2F 1.1(b)(1), United States v. Morris, 80 F.3d 1151, 1173 (7th Cir.), cert. denied Gardener v. United States, 519 U.S. 868, 117 S. Ct. 181 (1976). Hence, arguments that the loans were passed on to others borrowers (La Marina loans) and new borrowers failed to pay and/or increased the loans and/or that there was a guarantee when the borrower exited the original loan the resulting loss will not decrease or diminish the "intended loss" calculation.
INTENDED LOSS THE MIRANDEZ'S LOANS
The Mirandez's loans receive the same treatment by the court as the Gutierrez's loans. The loss to the Mirandez's loans affects only co-defendants Muñoz and Sánchez-Aran. The court in its Opinion and Order denying the Rule 29 Motion, Docket No. 1339, p. 32-40, sets forth specific conduct by Sánchez-Aran and Muñoz-Franco that establishes criminal liability as to both co-defendants describing fraudulent activity relating to said loans. The court restates salient findings. Loans were disbursed without Board's approval, construction certificates were authorized for work not performed and/or completed as certified. Further, moneys from one loan were derailed to pay interest and/or principal as to other unrelated loans. This process maintained an appearance of performance as to loans and disguised as income producing loans what otherwise were non performing loans that would otherwise cause reserves to be established by the regulators. Once again the Board was not notified as to shifting of moneys to pay other loans and Mirandez's requests to the contrary were quickly dismissed by Sánchez-Aran. Loans were increased without additional collateral. Direct transfers of loan proceeds were made internally by the bank even without knowledge of Mirandez. Co-defendant Muñoz was kept fully informed through the cumulative reports of the borrowers status and construction reports of both Gutierrez and Mirandez's loans prepared and presented to him as testified by Ms. Enriquez. Further, Ms. Enriquez indicated that her calendar showed extensive meetings between her, Muñoz-Franco and Sánchez-Aran regarding Mirandez and Gutierrez's loans. Muñoz-Franco and Sánchez-Aran were present in many of the Mirandez's loan presentations to the Board of Directors. (Reparto Valenciano Ex. 7(b), Bubao II Ex. 14(b), Extensión Marisol Ex. 62(a), Vistas Atlántico II Ex. 8(b), Gurabo I, Ex. 125(a). Payments of construction certificates were unduly authorized by Dr. Sánchez-Aran. Muñoz further prevented the bank internal auditor from auditing the construction loans including the Mirandez's loans. Later when the regulators are in the hunt of the irregularities of the construction loans, Muñoz and Sánchez-Aran are instrumental in the preparing of the Denby letter, Ex. 186, wherein it is stated that " never [has the Board] considered and much less approved any policy or practice of permitting borrowers to use construction loan proceeds to satisfy or make interest payments on other unrelated loans." The record reflects a continued practice to the point where moneys were internally transferred in the Bank without knowledge of the borrower/constructor thereby weakening the loan. The court concludes on preponderance of the evidence standard, based on circumstantial and direct evidence, that both Muñoz and Sánchez-Aran knew and approved of the practice of paying with loan proceeds for the principal and interests of other unrelated loans and knew about unwarranted construction certification payments. This, of course, created a fictitious scenario of performing loans and income derived from these loans when in reality they were non performing loans which mandated reserves to be established by the regulators.
The intended losses as to Muñoz/Sánchez-Aran are as follows as more fully explained at Ex. II (Mirandez's loans). All loans are explained with specific references to exhibits at Ex. II(a) through II(m). The construction loans are the following:
II(a) Reparto Valenciano 2,200,000 (b) Villas del Gurabo I 90,000 (c) Villas del Gurabo II 440,873 (d) Jardines de Bubao I 525,000 (e) Jardines de Bubao II 563,500 (f) Extensión Marisol 46,000 (g) Las Carolinas I 110,788 (h) Las Carolinas II 565,000 (i) Valle Piedras 785,000 (j) Paseo Santa Juanita 93,405 (k) Villa Santa Juanita 283,000 (l) Vistas de Atlántico II 255,000 (m) Valle Bello 1,905,662 ___________ TOTAL intended loss attributed to co-defendants Muñoz/Sánchez-Aran: $7,862,566
Each loan is attributed conduct which warrants the Stedman "intended loss" conclusion of attributing the resulting loan loss to those responsible for the fraudulent conduct. (Unauthorized loan increases, disbursements to pay other loans, transfers of loan amounts, payment of certification for work not performed, loans disbursed without Board approval and/or increased without Board approval, etc.)
INTENDED LOSS CO-DEFENDANT UMPIERRE
The salient facts related to co-defendant Umpierre are stated in the court's Opinion and Order of February 6, 2003, Docket No. 1339, at p. 13-17. As to co-defendant Wilfredo Umpierre the testimony at trial provided by Mr. Jorge Fabregas and Ms. Anabel Enriquez established that co-defendant Umpierre and Gutierrez signed and delivered construction certificates to the bank, (in some cases the certifications pre 1984 were prepared by Umpierre, his handwriting, and signed by others or him). They received the corresponding payments though the construction work was not completed and hence the certificate was not earned. The conduct occurred when Modules was the developer/borrower as well as when the developer/borrower was another company, or when the developer/borrower was Mr. Montilla. A similar scenario was repeated when the borrower/developer was Mr. Santiago the developer of Los Caciques Project. Santiago testified, for example, that as to Los Caciques Project a $750,000 payment was made directly to Modules from the project and he never saw the payment. Some checks were issued directly to Modules, other checks were issued jointly to his company and Modules requiring his signature; the checks required his signature but he never endorsed the checks. One check was even used to pay a Modules commercial loan to the bank without Santiago's knowledge. John Burns was rejected twice as a developer seeking finance from Caguas. Defendant Umpierre made to Mr. Burns a similar offer than that received and accepted by Montilla and Santiago. Umpierre would obtain the financing from Caguas Bank if Mr. Burns used Modules instead of conventional housing units. Burns accepted the offer. After only one week elapsed, Caguas Central Bank approved an 8.9 million dollar construction loan for the Cerrovista Project. Further evidence showed that Ariel Gutierrez and Umpierre made offers to various developers to obtain Caguas Central loans, if Modules units were used in the project.
As to Montilla, he had been denied financing by Caguas on three occasions but received financing in exchange for using Modules in the Jardines de Villa Alba Project. After accepting Umpierre's offer, Mr. Montilla received financing for $1,000,000.00 in two and a half months from Caguas Central. Two hundred and thirty thousand dollars ($230,000.00) were disbursed directly to Modules prior to the closing of the loan documents without the knowledge of the borrower/developer Montilla. The loan settlement was faulty as it indicated that $747,000 was available to the borrower at closing when only $485,000 was available. A $1.4 land loan cost was set forth in the loan document yet only $480,000.00 was the real cost, the difference was ultimately utilized to repay a prior outstanding debt owed by Modules to Caguas on other loans. (Ex.24(a).)
The court applies the United States v. Stedman, 69 F.3d at 741 doctrine to co-defendant Umpierre. He is to be responsible for the resulting loss associated with the loans that Umpierre facilitated through false certifications and wherein he acted as an agent of Modules and/or Caguas Central seeking developers for Caguas Central using Modules units.
Levittown Plaza $460,000.00 Quintas de Country Club 214,000.00 Villa Alba 66,000.00 Los Caciques $1,200,000.00 Cerrovista 909,000.00 _____________ TOTAL $2,849,000.00
In Levittown Plaza Trans Globe phase, Umpierre prepares the certification (his handwriting) and signs on behalf of another (including Ariel Gutierrez). The same occurs in Country Club, Trans-Globe phase. This finding is made at sentencing phase closely examining the documents and taking into consideration Jorge Fabrega's testimony that Umpierre began to work as Vice-President of Finance of Trans-Globe around 1981-1982 (Fabregas, May 30, 2001 testimony, Tr. p. 131).
In conclusion, co-defendants Muñoz-Franco and Sánchez-Aran's responsibility on intended loss calculation constitutes the addition of the intended loss related to the Gutierrez's loans ($13,906,177.00) and the intended loss for the loans of Mirandez, ($7,862,566.00), for a total of $21,768,743.00. The intended loss calculation for co-defendant Gutierrez is $8,657,177.00. The intended loss calculation for co-defendant Umpierre is $2,849,000.00.
IT IS SO ORDERED.
Non-performing Authorized and Unauthorized Construction Loans EX. I(a) Gutierrez Loans
La Marina Project:
• Original Construction Loan Authorization to Transglobe in March 1977 for 2.8 million
• Later increased to $4.5 million
• Eventually increased to $7 million
Loan Performance
Transglobe Phase
• The project involved the construction of seventy-five (75) single family units. However, no family units were ever constructed in the final phase of the project.
• By October 1984 a $717,000 balance remained on the bank books.
Dow Phase
• The Transglobe balance was eventually satisfied by a $3.3 million loan granted to Dow Group III owned by co-conspirator Dominguez-Wolff, although the corporate entity only had $20,000 in equity, for the purchase and development of the construction project. Eighty-five (85) housing units were to be built.
• Transglobe was kept on as the house constructor for the project in spite of its failure to previously perform on its construction obligation.
• Board of Directors not told at the closing that a remnant of land on which eight-five (85) modular units were to be built in twenty-four (24) months was impossible to be built at the time as the subject land parcel was occupied by the Modules plant.
• La Marina project was eventually acquired by an investor group of which defendant Ariel Gutiérrez was a member resulting in an overall loss of $1.1 million to Caguas.
Evidentiary Source: Testimony of James Lynn, 8/27/01, pages 116-120 Testimony of Victor Kareh, 1/30/01, page 103 Ledger Card Exhibit 5B
Total Loss: $717,000 attributable to Gutiérrez $1.1 million attributable to Muñoz/Sánchez
EX. I(b)
Levittown Plaza Project :
• Original Construction Loan Authorization to Transglobe in January 1981: $5.3 millionLoan Performance
Transglobe Phase
• The project involved the development of ninety-six (96) single family units. No unit construction for two (2) years. Only seventeen (17) units eventually constructed by Transglobe.
• $460,000 paid in construction certifications for work not undertaken.
• $400,000 disbursed to pay other Gutiérrez loan.
• By October 1984 a $3.3 million dollar balance remained on the bank books.
Dow Phase
• The Transglobe balance was eventually satisfied by a $5.2 million dollar loan granted to Dow Group III owned by co-conspirator Dominguez-Wolff, although the corporate entity only had $20,000 in equity, for the purchase and development of the construction project.
• Transglobe was kept on as the house constructor for the project in spite of its failure to previously perform on its construction obligation.
• Muñoz and Sánchez presented Dow loan application to the Board of Directors without reporting that Transglobe had been kept on as project constructor in spite of its failure to previously perform on its construction obligation.
• $229,000 construction certification payments to Transglobe for work never undertaken.
• Seventy-three (73) housing units were to be built by Transglobe, but done were constructed.
• Domínguez-Wolff eventually built the project using conventional housing units seven (7) years behind schedule
• An overall loss of $3.1 million was sustained by Caguas.
Evidentiary Source: Testimony of Victor Kareh, 02/05/01, pages 20-25, and 2/06/01, pages 3-4 Ledger Card — Exhibit 8 Exhibits 46, 49b1-59b13
Total Loss: $860,000 attributable to Gutiérrez $460,000 attributable to Umpierre $3.1 million attributable to Muñoz/Sánchez
EX. I(c)
Ouintas de Country Club Project :
• Original Construction Loan Authorization to Transglobe in March 1982:$3.6 millionLoan Performance
Transglobe Phase
• The project involved the construction of seventy-four (74) single family units in twenty-four (24) months. No units were constructed.
• $214,000 paid in construction certifications for work not undertaken.
• $60,000 disbursed to pay other Gutiérrez project obligations
• By October 1984 a $2.3 million dollar balance remained on the bank books.
Dow Phase
• The Transglobe balance was eventually satisfied by a $5.2 million dollar loan granted to Dow Group III owned by co-conspirator Domínguez-Wolff, although the corporate entity only had $20,000 in equity, for the purchase and development of the construction project.
• Transglobe was kept on as the house constructor for the project in spite of its failure to previously perform on its construction obligation.
• Muñoz and Sánchez presented Dow III loan application to the Board of Directors without reporting that Transglobe had been kept on as project constructor in spite of its failure to previously perform on its construction obligation.
• $231,000 were paid to Transglobe for construction certifications for work never undertaken.
• Only twenty-two (22) of fifty-four (54) units were built by Transglobe during the DOW phase.
• An overall loss of $2.9 million was sustained by Caguas.
Evidentiary Source: Testimony of Victor Kareh, Demonstrative Exhibit G Ledger Card — Exhibit 18 Exhibits 49a1-49a11, 49b1-49b13,49b 22, 49(i)e-49j (Some of the certificates were prepared by Umpierre in his handwriting and signed by Aricl Gutierrez and others.) Exhibit 16
Total Loss: $274,000 attributable to Gutiérrez $214,000 attributable to Umpierre $2.9 million attributable to Muñoz/Sánchez
EX. I(d)
Jardines de Villa Alba Project:• Original Construction Loan Authorization to Modules in July 1985: $1.1 millionLoan Performance
• Ariel Gutierrez told Enrique Santiago that he could get financing at Caguas if he used Modules.
• The project involved the construction of twenty-three (23) single family units. Only one (1) unit was installed.
• $66,000 paid in construction certifications for work (foundations) not done.
• $231,000 disbursed prior to closing of loan agreement.
Evidentiary Source: Exhibits 107a-107e Aerial Photo 189 Ledger Card Exhibit 20
Total Loss: $297,000 attributable to Gutiérrez/Muñoz/Sánchez $66,000 attributable to Umpierre
EX. I(e)
Los Caciques Project:• Original Construction Loan Modules Constructor in July 1985: $6.8 millionLoan Performance
• $603,000 loan given without authorization from the Board of Directors
• $1.2 million were paid to Modules in construction certifications for work not undertaken.
• $65,000 disbursed to pay other Gutiérrez loans
•
Evidentiary Source: Testimony of Enrique Santiago, 7/3/01, pages 14 and 19 Testimony of Víctor Kareh, 02/21/01, page 52 Demonstrative Exhibit x Ledger Card Exhibit 15
Total Loss: $1,868,000 attributable to Gutiérrez/Muñoz/Sánchez $1,200,000 attributable to Umpierre
EX.I(f)
Los Mameyes Project:• 2.8 million loan disbursed without authorization to Modules in November 1985-November 1986.Loan Performance
• Loan never presented to or authorized by the Board of Directors.
• $1.2 million paid by CRUV to Modules which Modules kept and never applied to loan.
• $266,000 were disbursed to pay construction certifications of other Gutiérrez projects.
• $595,000 were disbursed to pay for Gutiérrez commercial loans.
Evidentiary Source: Testimony of Victor Kareh, 02/27/01, pages 59-74 Demonstrative Exhibitor Exhibits 108b1-108f, 108xx, 108yy, 108aaa-108ddd, 108hhh-108iii
Total Loss: $2.8 million attributable to Gutiérrez/Muñoz/Sánchez
EX.I(g)
The Cerrovista Project :
• Construction Loan to Modules Constructor in September 1986: $8.9 millionLoan Performance
• $932,177 disbursed without authorization from the Board of Directors to pay unrelated Gutiérrez Construction/Commercial Loans (See attached Chart). $1,412,177 authorized for land acquisition cost, but disbursement was for $78,790.17.
• $157,500 were disbursed in November 1986 to pay pre-manufacturing expenses for work not undertaken.
• $751,500 were disbursed in December 1986 to pay for pre-manufacturing expenses for work not undertaken.
Evidentiary Source: Exhibits 57c, 190f-190f1, 190e.
Total Loss: $1,841,177 attributable to Gutiérrez/Muñoz/Sánchez $909,000 attributable to UmpierreTotal Individual Losses :
Muñoz-Franco/Sánchez-Arán: $12,650,354 Gutierrez: $ 8,657,177 Umpierre: $ 2,849,000Caguas Board of Directors Meetings:
La Marina Transglobe Phase: June 23, 1980 Exhibit 4c La Marina Dow Phase: October 24, 1984 Exhibit 38
Levittown Transglobe Phase: January 20, 1981 Exhibit 7a Levittown Dow Phase: October 24, 1984 Exhibit 6b
Quintas de Country Club Transglobe Phase: January 20, 1981 Exhibit 7a Quintas de Country Club Dow Phase: October 24, 1984 Exhibit 30a
Jardines de Villa Alba: July 31, 1985 Exhibit 14a
Los Caciques: July 31, 1985 Loan 105b (No approval) Loans 138/139b Exhibit 14a
Los Mameyes No board approval
Cerrovista September 10, 1986 Exhibits 25a, 72b
Additional Sources of Information:
• Independent Report of Examiners Exhibit 2 series
NOMINEE LOANS:
The following loans were paid to Gutierrez creditors by Sánchez-Arán without board authorization. Loans were to be repaid by Gutierrez, but were never repaid.
• Acana Realty: $30,443 • Roberto Ponce: Unknown • PF Advertising: $95,519
Evidentiary Sources: Testimony of Arturo Somohano: 6/6/01 pages 77-79, 6/19/01 page 91, Exhibit 225b, 225c, 225d, 225e2
Non-performing Authorized and Unauthorized Construction Loans
* Mirandes Loans * EX. II(a)
Note: Financial condition of Mirandes entities at time of loan disbursement indicative of an inability to repay loans.Reparto Valenciano Project: Loan Performance
• December 31, 1981: $400,000 disbursed without authorization.
• August 9, 1983: $300,000 loan increase unauthorized.
• January 31, 1984: 1.5 million loan increase unauthorized of which $50,000 was paid to other Mirandes loans.
• April 12, 1984: Loan application approved.
• May 15, 1984: Loan closing. Financial transactions were conducted prior to closing.
Evidentiary Source: Exhibits 89a-89b, 125a, 125, 68, 80, and 67. Ledger Card Exhibit Series 89
Total Loss: $2.2 million attributable to Muñoz/Sánchez
EX.II(b)
Villas de Gurabo I Project: Loan Performance• August 1983: Loan granted for $828,000.
• $90,000 was paid out to other Mirandes loans
Evidentiary Source: Exhibit 92 Exhibit 125a
Total Loss: $90,000 attributable to Muñoz/Sánchez
EX. II(c)
Villas de Gurabo II Project: Loan Performance
• July 1985: Loan granted for 1.3 million.
• April 28, 1989: $260,873 loan increase given without authorization
• November 1985-August 1987: $100,000 were disbursed to pay other Mirandes loans.
• $80,000 disbursed to pay expenses for other projects.
Evidentiary Source: Exhibits 179, 219, 93, 100-Ia, 100-Ib, 100-IId-100-IIh, 100-IIIa, 100-IIIb, 100-IIId, 100-IIIh-100-IIIj
Total Loss: $440,873 attributable to Muñoz/Sánchez
EX. II(d)
Jardines de Bubao I Project: Loan Performance• December 1984: Loan granted for $516,000.
• December 1984: $25,000 was disbursed to pay Reparto Valenciano Project.
• December 1984: $500,000 was disbursed to pay other Mirandes loans.Evidentiary Source: Exhibits Ledger Cards 89-90
Total Loss: $525,000 attributable to Muñoz/Sánchez
EX. II(e)
Jardines de Bubao II Project: Loan Performance• April 2, 1985: Loan granted for $860,000.
• July 18, 1985-July 19, 1988: $478,000 was disbursed to pay other Mirandes Projects.
• $85,500 was disbursed to pay expenses of other projects.
Evidentiary Source: Exhibits Ledger Cards 98 Exhibits 195-1a/1b
Total Loss: $563,500 attributable to Muñoz/Sánchez
EX. II(f)
Extension Marisol Project: Loan Performance• December 1984: Loan granted for $1.7 million
• $46,000 was disbursed to pay expenses for other projects.
Evidentiary Source: Exhibits 111a-111b Exhibit Ledger Card 94Total Loss: $46,000 attributable to Muñoz/Sánchez
EX. II(g)
Las Carolinas I Project: Loan Performance
• July 1985: Loan granted for $800,000.
• $103,091 was disbursed to pay other Mirandes loans.
• $7,697 was disbursed to pay expenses of other projects.Evidentiary Source: Exhibits 95, 196(f), 111a
Total Loss: $110,788 attributable to Muñoz/Sánchez
EX. II(h)
Las Carolinas II Project: Loan Performance• November 1985: Loan granted for $2.3 million.
• $400,000 was disbursed to pay other Mirandes loans.
• $165,000 was disbursed to pay expenses for other projects.
Evidentiary Source: Exhibits 96, 112-1a, 112-1b, 112-2g, 112-2f, 112-2e, 112-3m, and 112-3s.
Total Loss: $565,000 attributable to Muñoz/Sánchez
EX. II(i)
Valle Piedras Project: Loan Performance• June 1986: Loan granted for $4.6 million.
• $1,000,000 in interest was capitalized.
• $600,000 excess of approved interest reserve.
• $185,000 disbursed to pay expenses of other projects.
Evidentiary Source: Exhibits 102, 115-1a, 115-1e-1g, 115-2a-2f, 115-2m-2n, 115-2s, 115-2u-2v, 115-3a, 115-4j, 115-4p, 115-5a, 115-5c-5e, 115-5h, and 115-5j.
Total Loss: $785,000 attributable to Muñoz/Sánchez
EX. II(j)
Paseo Santa Juanita Project: Loan Performance• August 1986: Loan granted for $900,000.
• $93,405 was disbursed to pay expenses of other projects.Evidentiary Source: Exhibits 199a, 199c-e, 199g
Total Loss: $93,405 attributable to Muñoz/Sánchez
EX. II(k)
Villas Santa Juanita Project: Loan Performance
• August 1986: Loan granted for $1.1 million.
• $160,000 capitalized in interest
• $121,000 excess in interest reserve.
• $162,000 was disbursed to pay expenses of other projects.Evidentiary Source: Exhibits 103i, 103n-s, 198a-d
Total Loss: $283,000 attributable to Muñoz/Sánchez
EX.II(l)
Vistas del Atlántico II Project: Loan Performance• July 1988: Loan granted for $1.6 million.
• $55,000 was disbursed to pay other Mirandes loans.
• $200,000 was disbursed to pay expenses of other projects.
Evidentiary Source: Exhibits 106, 114aa, 114a, 114j, and 114o
Total Loss: $255,000 attributable to Muñoz/Sánchez
EX. II(m)
Valle Bello Project: Loan Performance• August 1986: Loan granted for $3.4 million.
• August 1989: $525,662 unauthorized loan increase
• $20,000 was disbursed to pay other Mirandes loans.
• $1,360,000 was disbursed to pay expenses of other projects.
Evidentiary Source: Exhibits 97, 265, and 127 series
Total Loss: $1,905,662 attributable to Muñoz/SánchezTOTAL LOSS ATTRIBUTABLE TO MUNOZ/SANCHEZ: $7,863,228 Caguas Board of Directors Meetings:
Reparto Valenciano: April 29, 1981 Exhibit 7b Gurabo I: August 11, 1983 Exhibit 125a Gurabo II: July 2, 1985 Exhibit 14b Bubao I: December 3, 1984 Exhibit 62a Bubao II: July 2, 1985 Exhibit 14b Extension Marisol December 3, 1984 Exhibit 62a Carolina I: July 2, 1985 Exhibit 14b Carolina II: November 27, 1985 Exhibit 70a Valle Piedras: June 18, 1986 Exhibit 102 Paseo Santa Juanita: August 5, 1986 Exhibit 25b Villas de Santa Juanita: August 5, 1986 Exhibit 72b September 29, 1986 Exhibit 72b Vistas de Atlántico I March 5, 1987 Exhibit 99c February 12, 1988 Exhibit 78-1a May 5, 1988 Exhibit 110-1a Vistas de Atlántico II July 14, 1988 Exhibit 81b Valle Bello August 5, 1985 Exhibit 25b
DEFENDANT LORENZO MUÑOZ FRANCO'S MEMORANDUM REGARDING THE "DENBY LETTER"
This memorandum is submitted to address the concerns of the Court regarding the so-called "Denby Letter," which was Exhibit 186 at trial. The Court has relied upon this document as evidence against Munoz of fraud or concealment. To the contrary, this letter is compelling exculpatory evidence that the banking practice which is at the heart of the government's case — the devotion of loan proceeds from one loan to another — was well known to the Caguas Board and to the government regulators. Right or wrong, there is no evidence that the practice was concealed from anyone.Defendant Lorenzo Muñoz Franco respectfully submits that the purpose of the Denby letter — as to the issue of transfers between loans — was not to deny or conceal certain practices or occurrences to the Board nor to the examiners but to restate the Bank's legal interpretation of a practice that was neither concealed nor denied, but, as a matter of fact, was extensively discussed between the Board, the bank's officers and the federal examiners.
The issue of the true of the true nature of this statement is critical to defendant Muñoz Franco, because (1) the Government presented the Denby Letter as an act in furtherance of the alleged conspiracy; and (2) the Court relied heavily on this letter to connect defendant Muñoz Franco to the alleged conspiracy. Defendant Muñoz Franco respectfully submits that there is no concealment of facts but rather a discussion of the legal significance of certain practices that were well known to the examiners and openly discussed with them. The Denby Letter represents the culmination of that debate.
The following analogy should clarify the essential distinction between an act of concealment of facts and the expression of a view on a legal controversy: A person dies of a heart attack in the parking place of a shopping mall. The incident is extensively covered by the radio and television stations and, of course, brings to the scene representatives of management, the Police, the Department of Justice and the Institute of Forensic Sciences. The next morning one of the newspapers publishes the headline "Murder at Shopping Mall." Management reacts with a letter to the newspaper which states "Management wishes to state in no unclear and uncertain terms that there was no murder yesterday at the mall." This letter, obviously, should not be constructed as a denial or concealment of the fact that a person died at the mall, but merely as a clarification of an erroneous interpretation of the incident. It is not hiding or denying facts, but expressing that the legal issue of the cause of the death (an accident or natural occurrence vs. a criminal act) has been misreported.
That such is the true nature of the Denby letter is also evident from a close examination of the pertinent Minutes of the Board of Directors and the testimony in Court of witness Anabel Enriquez. See Anabel Enriquez testimony, Tr. May 16, 2001, pp. 17-21, 23, 26.
At the hearing on February 6, 2004 the Court referred to the absence of any evidence of this practice, which is referred to herein as "cross-lending," during the early 1980s, when many of the loans at issue were initiated. That is absolutely correct — there is no evidence to this effect because cross-lending was a practice that was put in place some time in 1986 to address the poor performance of those loans, after the bank began to experience difficulties with them. Leaving aside whether this practice was ill advised, the central point here is that it was openly adopted, openly applied, candidly revealed to the examiners, and thereafter openly debated between the examiners and the Board.
1. Cross-Lending Was a Response to Earlier Difficulties With the Loans
Many of the Modules and other loans were not performing well by about 1985. This is no evidence of criminal behavior. It may have been the result of banking practices which are now criticized, and Caguas' response — to initiate the practice of cross-lending — may be criticized still.
In any event, early evidence of the use of this practice is found in the minutes of the Caguas Executive Committee — whose members were also members of the Caguas Board, including the government's witness, Roberto Lugo Rigau. Neither Munoz Franco nor Sanchez Aran was present at this meeting. On August 5, 1986 the Executive Committee approved a $660,000 loan in relation to the Valle Bello project. The notes related to the loan state that the proceeds were for "partial repayment of [sic] other loans." Exhibit 25(b).
The government will make much of the fact that this particular instance of cross-lending was not presented to the jury. The government conveniently ignores that it indicted Munoz based on this transaction, see Counts Seven and Eight of the indictment. Also, that, while the government never conceded it, it indeed dropped those charges only in response to the Munoz' Motion to Dismiss (Docket No. ___). In that motion, Munoz demonstrated this and other instances of cross-lending, each of which was openly adopted in the records of the Caguas at proceedings not attended by Munoz.
Why would the government have indicted on the basis of those events in the first place? Had it not reviewed the documents, which clearly show lack of concealment? The government's concession constitutes a tacit admission that this is indeed exculpatory. In fact, in response to a request by defendant Muñoz for Brady and Kyles material, the government furnished the Denby letter to defendant Muñoz as the only document that could be regarded as Brady exculpatory material. This is indicative of the central point that the practice of cross-lending was openly followed, not concealed by Munoz or anyone else. The government proceeded against Munoz thereafter only on the basis transactions in which specific reference to cross-lending cannot be found, as if the absence of entries in these instances indicates concealment of this well-known practice, which is evidenced in many references in the records of Caguas.
2. There are Multiple References to Cross-Lending in the Caguas Documents, and There is no Evidence that Munoz Either Initiated or Concealed the Practice
The following table lists those Board of Directors or Executive Committee minutes in which evidence of the open application of this practice can be found: Ex. # Date Meeting Was Project/ Evidence of Cross- Munoz Developer Lending Present?
14(a) July 31, BOD Yes Modules $3,000,000 — cross 1985 collateralization from projects of "related corporations" 25(b) Aug. 5, Exec No Valle $660,000K for 1986 Bello "partial repayment of [sic] other loans" — loan presented by Enriquez (this was charged in Counts 7 and 8 of the former indictment) 25(b) Aug. 5, Exec No Villas de $165,000 for 1986 Santa "partial repayment Juanita of other loans" (this was charged in Counts 9 and 10 of the former indictment) 25(b) Aug. 5, No Paseo de $96,000 for "partial 1986 Santa repayment of other Juanita loans" (this was charged in Counts 11 and 12 of the former indictment) 25(a) Sep. 10, Exec No Valle $860,000 "for 1986 Piedras other loans" (this was charged in Counts 5 and 6 of the former indictment) 25(a) Sep. 10, Exec No Las $503,000 "for other 1986 Carolinas loans" (this was II charged in Counts 13 and 14 of the former indictment) 25(a) Sep. 10, Exec No Cerrovista $855,323 for 1986 "Partial assumption of other loan" (Counts 15 and 16 of the former indictment) Sep. 29, Loan Cerrovista list of entries 1986 Settlement totaling $932,177, Statement listed as for "Repayment of other loans" (Counts 17 through 20 of the former indictment) 126(a) Jan. 15, Exec No Modules Restructuring — 1987 (Santiago) Application notes that proceeds will pay overdraft of previous loan and revolving line of credit. 99 Fe. 5, Exec No DOW Revolving loan of 1987 $1,550,000 approved "in addition to amounts owed at the Construction loan Department . . . to consolidate outstanding loans including $1,050,000.00 to cover various overdrafts." 99(c) Mar. 5, Exec No Frosan Frosan granted a 1987 (Santiago) $1.5 million revolving line of credit secured by "second mortgages over several projects under development to cover an overdraft of $546 m; $550m to finish several projects (lots) presently under development and $450m for the purchase of properties for future developments." 315(c) Mar. 12, Exec No Rogue Rogue $650K 1987 consolidating loan — "we shall receive . . . 10% of each certificate. . . in relation to various construction projects" 176 Sep. 10, Exec No Rogue approved payment 1987 of overdrafts from construction certification funds 319(b) Sep. 24, Exec No Rogue $665,000 to be 1987 repaid with 2% of all sales in various projects 319(b) Sep. 24, Exec No Mirandes $1,000,000 to be 1987 repaid with 10% of each certification 3. From Early 1986 Through Early 1987, There Was an Open Discussion Between Caguas and its Regulators Regarding Cross-LendingThe bank's examiners noted the practice of cross-lending during the 1987 examination, which began early that year. In the 1987 Examiners' Report, Exhibit 2(D) at trial, the Court will find open reference to the cross-lending practice and Caguas' response.
Page A-12.3 of the 1987 Report, dated March 3, 1987, almost a year before the Denby Letter, contains the examiners discussion of their findings regarding cross-lending and the bank's response:
A review of construction loans for projects using units provided by Modules disclosed that the bank has established the practice of using loan proceeds on construction loans to satisfy or to make interest payments on loans which are unrelated to the respective construction projects. For details of the transactions related to this practice, refer to the comments on loans no. 103-E, 108, 138, 142, 143, 170-, and 171."
Each of those loans is a Modules-related loan. Cleary, when the examiners referred to "unrelated loans" they meant unrelated to the specific project, not to the same developer.
The numbers correspond to the loans as follows: 103A-E, General Builders, Inc; 138, Frosan Development, Inc., Riverfront; 142, Modules Manufacturing, Los Mameyes; 143, Modules Manufacturing, Coamo; 170-, Iantho Corp., Costa Este; 171, Iantho Corp., Cerrovista Residential. See 1987 Report at A-12.12.
The examiner apparently asked about the practice and got this response:
Management submitted the following statement when it was questioned about this practice:
Last year, the institution established the policy of allowing some clients who had been debtors on certain projects for a certain length of time, to strengthen their position on some projects by distributing the debt to other projects for which they had requested financing, to the extent the equity in the new projects was sufficient. We agreed to advance loans on these new projects aside from loans for the projects themselves, to apply against the outstanding balance on other projects so as to make it convenient for the developer to allocate repayment in an acceptable fashion, each project carrying part of the repayment load.
The examiners then registered their criticism:
The exact meaning of this statement is unclear to the examiners. Based on a review of the respective loan files, it is not clear why the bank has initiated this practice. Since this apparently results in overdisbursements on individual projects and since the bank's records relating to this practice are unclear, it appears that this may be an unsafe and unsound practice procedure. Comments to follow will note that this procedure is also used in loans to Francisco Mirandes.
The report contains many additional references to this practice, which are found in the specific discussions of the loans at issue:
• Loans 103A-E: "interest payments have been made from loans in process of Loan No. 183. " (page A-12.18)
• Loans No. 142 and d 143: "As of February 28, 1987 the loans are current with regard to interest. However, since November, 1986 interest payments have been made from disbursements from the loan in process account of loan No. 138. It is not clear why interest payments are received from the proceeds of loan No., 138." (page A-12.23)
• Loan No. 170: "The remaining balance of the prior loan ($855,323) was paid from loan No. 171, Cerrovista.
• Loan No. 171 (Iantho Corporation, Cerrovista) — "No explanation is evident as to why payments for other loans were made from the proceeds of this loan (Refer to separate comment regarding loan payments.)"
• Loan No. 98 (Jardines de Bubao) — "Interest payments were made from payments for releases of homes sold, and advances totaling $92,312 from loan No. 128." (page A-12.31)
• Loan No. 62 (Reparto Valenciano) — "Reductions in the loan balance were made from payments for releases of homes sold, and from advances from other construction loans on projects owned by Francisco Mirandes." (page A-12.32)
• Loan 128 (Jardines de Bubao II) — " The loans in process account was partially depleted as a result of principal and interest payments made on other loans granted to projects owned by Francisco Mirandes. The payments totaled $165,478, resulting in an overdisbursement of this loan." (page A-12.34).
• Loan No. 145 (Los Carolinas II) — Interest payments are current, being made from the loans in process account. In addition, $224, 195 and $637,297 respectively were advances from loans in process to make interest payments on loan No. 62, Deproco Corporation and to make principal loan reductions on four construction loans made to companies owned by Mr. Mirandes." (page A-12.36)4. The Board Discussed the Examiners' Findings and the Denby Letter Was Prepared in Response
These examiners' findings regarding cross-lending were discussed in subsequent board meetings. The minutes from November 30, 1987 indicate:
Mr. Munoz proceeded to inform the Board that on November 17, 1987 a Supervisory Letter signed by Mr. Richard Denby and the accompanying report of examinations were brought to his attention. The President proceeded to contact Mr. Denby by telephone on Thursday November 19, 1987 and a meeting was arranged on Tuesday November 24, 1987, for the purpose of discussing corrections and clarifications of factual, conceptual and policy matters covered in the letter based on the examination report.
The findings referred to in this letter are essentially the same as those included in the draft of the comments that the examiners gave management before leaving the Bank after its examination, with the exception of the comments contained in Mr. Denby's letter under the captioned "loans to Francisco Mirandes." These drafts together with management's response had been thoroughly discussed at the board meeting of June 25, 1987. Mr. Munoz informed the Board that Mr. Denby will be meeting with the Board during the first weeks of December. Mr. Munoz informed the Board that Mr. Denby had agreed in the meeting of November 24, 1987 at the suggestion of Mr. Munoz that copies of the report of examinations and the letter would not have to be distributed to each director a week in advanced in order to protect their confidentiality if the Board so decided.
On December 11, 1987 there was a special meeting of the Board of Directors "to discuss the findings of the examiners based on the examination made of the Bank as of February 28, 1987 and also the supervisory order of Mr. Richard Denby dated November 13, 1987." Denby and two of his staff were present at this meeting. They discussed the classification of a number of loans including Levittown, La Marina, Quintas de Country Club, Costa Este, Marines, and Altamira, and they discussed the Modules loans. The minutes reflect the following discussion of the examiners' report:
The examiners also stated in the report that in addition to the loans granted directly to Modules, the Bank had granted construction loans to companies either owned by Modules, related to Modules, or which had a contractual relationship to Modules . . . The Board of Directors stated that it had received comprehensive reports detailing the Savings Bank involvement with Modules and related companies from management, that it was fully appraised by management of the situation related to said borrower and fully participated in the analysis of the same and the extension of credit to this borrower. . . . The Board stated, and Mr. Denby agreed that it would continue to give support to Modules through further financing of its operations as required in order to make viable the business plan represented and approved by the Board as the same might be ammended [sic] in the future.
At this meeting the Board also discussed Mirandes, clarifying that the loans discussed in the examiners report "were not loans to Francisco Mirandes but to corporations in which Mr. Francisco Mirandes is the principal stockholder." Even more directly, the Board confronted the issue of cross-lending.
The Board also clarified, to the satisfaction of the supervisors, that the intra company transactions, principally debt assumptions in the case of Deproco Corporation were made in order to improve the collateral and the prospects for collection of an old problem loan that had been on the books of the Bank before the actual management was appointed, and that the extension of said credit to companies in which Mr. Mirandes is the principal stockholder cannot be characterized as an unsound and unsafe practice.
At the next meeting of the Board on December 29, 1987, Munoz "informed that the letter to Mr. Richard Denby [in response to his] will be prepared on or before January 10, 1988." He invited Anabel Enriquez to make a presentation, during which she indicated the bank's forecast for these loans: "Mrs. Enriquez informed that the outstanding amount of the construction loans is 115 million; that the outstanding loan amount will be reduced to about 50 to 60 million in eighteen months this is a forecast of the department."
The Denby letter was produced on time. In light of the history of discussions between the examiners and the bank regarding cross-lending, the references in the Denby Letter to that practice must now be clear. At page 5, the Letter recalled that Denby had been advised, during the previous discussions, that
the reference to unsound and unsafe practices regarding interest payments on unrelated loans and alleged proceeds from loans to make interest payments and principal reduction on unrelated loans was also clarified to your satisfaction. In two cases, (General Builders (Loans 103 A-E) and Riverfront (Loan 138) it was clarified and substantiated that the payment of interest by Modules was part of the contractual relationship of these corporations with Modules Manufacturing by which the interest on loans made by the Bank to these borrowers for the purchase of units was to be paid by Modules until delivery of the units to the projects.
Denby Letter, p. 5. The letter then reviews the Cerrovista loan and the approval of related lending: "The developer, owner of this project, purchased the Costa Este project and assumed the debt that this project had with the Bank and part of the debt that the seller had with the Bank on the Quintas De Fajardo project. The Board of Directors approved the granting of the loan to Cerrovista which included the assumption by Cerrovista of this indebtedness to the Bank." Again, with regard to Deproco: "The collateral position of the Bank in this loan was improved by the assumption of indebtedness on set project by economically feasible projects, owned by the debtor and related companies, with the value in their collateral which permitted set assumption without creating the possibility of any collateral deficiencies." Denby Letter, pp. 6 and 7.
Next comes the misinterpreted quote:
This Board of Directors wishes to state in no unclear and uncertain terms that it has never considered and much less approved any policy or practice of permitting borrowers to use construction loan proceeds to satisfy or make interest payments on other unrelated loans. This Board has never consider [sic] or much less approve [sic] any policy whose application might result in over disbursements on individual projects or may distort any delinquency report.
Clearly here, the word "unrelated" does not exclude the cross-lending practice which had been discussed in such detail.
The rest of the Denby Letter makes repeated reference to cross-lending. At page 26 there is a direct reference to cross-lending involving Cerrovista: "This loan was classified substandard by the examiners, since they felt that the amount dispersed at the time could exceed the value in place due to the payment for other loans and the lack of approval for site improvements." Again with regard to Deproco, at page 27: "This loan was classified substandard due to the lack of an appraisal for the project, slow sales on the reliance on payment from advances of other related loans. " The Letter commented that the reduction in outstanding amounts owed on this loan was due to " assumptions of part of the indebtedness of this loan by other projects of Deproco Corp. and Mr. Frank Mirandes, which recognized that the indebtedness to the Bank on this project is the responsibility of the total corporate structure, not only of Deproco, but also of related corporations." p. 28.
With regard to Modules, the Denby letter once again frankly recognizes that "one of these alleged deficiencies is the dispersing of construction proceeds to satisfy or make debt service payment on unrelated loans. " p. 35. "In the case of Riverfront, the examiners indicated that payments were made from this loan to satisfy the indebtedness of Loan 105 which was unrelated project. The payments made from Riverfront to satisfy Loan 105 is not a payment unrelated to the project. . . . It, therefore, follows, that the amount dispersed for this project was not to satisfy debt or interest on and unrelated project." p. 36.
Summarizing as to past lending regarding Modules, the Denby Letter stated: "It was during this period that the Board had to make the decision of whether to closeout on Modules and simply lose the 4.6 million which it had loaned to Modules or continue giving support to the company until their problems could be resolved and they could again assume normal economic activities and also improve its capitalization to make up for the losses it incurred during this period." pp. 40-41.
Conclusion
The foregoing information is submitted to respectfully disabuse the Court of the notion that the Denby letter (Trial Exhibit 186) constitutes any of the following:
1. evidence in support of criminal liability for purported concealment by defendants Lorenzo Muñoz or Francisco Sanchez Aran of material facts from the Board of Directors or from examiners or regulators;
2. evidence in support of a finding of concealment on their part that would impact in the sentencing stage for the determination of which guidelines, if any, should apply;
3. evidence in support of a finding of concealment on their part that would impact on the imposition of a sentencing enhancement for "more than minimal planning" under U.S.S.G. Section 2F1.1(b)(2)(A) or for an "abuse of position of trust adjustment" under U.S.S.G. Section 3B1.3.
Respectfully submitted.
I hereby certify that a true and exact copy of the foregoing motion has been hand-delivered to AUSA Maria Dominguez, Suite 1201, Torre Chardon, 350 Carlos Chardon Street, Hato Rey, P.R. 00918; and Samuel Feliciano, Jr., Supervisory, U.S. Probation Officer, U.S. Probation Office, Room 143, Federal Office Building, Carlos Chardon Avenue, Hato Rey, Puerto Rico 00918; Mark Rochon, Esq., Millar and Chevalier Chartered, 655 Fifteenth Street, N.W., Suite 900, Washington, D.C. 20005-5701; Francisco Dolz Sanchez, Esq., G.P.O. Box 361451, San Juan, P.R. 00936-1451; and Michael S. Pasano, Esq., Zuckerman, Spaeder, Taylor Evans, LLP, Suite 900, Miami Center, 201 South Biscayne Boulevard, Miami, Florida 33131.