United States v. Natale

UNITED STATES OF AMERICA v. JOSEPH NATALE and GARY KETCHUM

Crim. No. 18-650 (KM)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

May 12, 2021

OPINION

The Court recently heard oral argument on certain pretrial motions in this criminal case. (See DE 88 (minute entry); see also Transcript, Apr. 29, 2021.) Most I have decided in the accompanying Omnibus Order, for the reasons expressed on the record. As to two, however, I reserved decision:

(a) the motion of defendant Natale to dismiss counts 4 and 7 of the Indictment (Point I, omnibus motion, DE 46), and

(b) the motion of the United States to voluntarily dismiss Counts 12 and 13 of the Indictment, and to strike paragraphs 13.h and 23.b (DE 65).

I write separately to supplement the reasons given on the record for denial of those two motions.

A. Background

Defendant Natale is the former CEO and Chairman of First State Bank (FSB). The Indictment alleges that Natale, along with codefendants Albert Gasparro and Gary Ketchum, engaged in various forms of misconduct, much of it surrounding a $7 million loan obtained from a Canadian bank to shore up the finances of FSB. I list the charges most pertinent to the current motions.

Count One charges a dual object conspiracy. The first object is to make false entries in the books of FSB with intent to defraud both the bank and the FDIC, contrary to 18 U.S.C. § 1005.

The second object of the conspiracy is to make and use counterfeit documents to influence an action of the FDIC, contrary to 18 U.S.C. § 1007. The government moves to strike that second object (specifically, paragraphs 13.h and 23.b), so that it is no longer asserted against any defendant, including Natale.

Count 4 charges Natale with making a false entry into FSB's records by having an individual execute a subscription agreement which falsely showed 478,000 FSB shares being purchased by an entity for $2.39 million.

Count 7 charges Natale and Gasparro with executing and backdating a Capital Raise agreement which fraudulently legitimized FSB's payment of a finder's fee to defendant Gasparro for work not performed, namely, "finding" entities which appeared to be investors in FSB.

Count 12 charges Ketchum with bank fraud (18 U.S.C. § 1344) based on his having caused FSB to pay premiums for insurance policies that he knew would not be honored by the issuer, Safecare LTD. Count 13 charges Ketchum with making a false statement to the FDIC (18 U.S.C. § 1007) with respect to the same insurance policies.¹

B. Motion of Defendant Natale to Dismiss Counts 4 and 7

As part of his omnibus motion (DE 46), defendant Natale moved to dismiss counts 4 and 7 of the Indictment for legal insufficiency.²

In general, Federal Rule of Criminal Procedure 7(c) requires only that an indictment state the offense's essential elements, sufficiently apprising thedefendant of the allegations, and specifically identifying the offense so as to permit the defendant to plead a former acquittal or conviction in the event of a subsequent prosecution. See, e.g., United States v. Kemp, 500 F.3d 257, 280 (3d Cir. 2007).

Federal Rule of Criminal Procedure 12(b)(3)(b) authorizes district courts to hear a motion for dismissal of counts of an Indictment for "failure to state an offense." Now, trials, not pretrial motions, are the means of testing the truth of an indictment's allegations. Nevertheless, a count of an indictment may be dismissed for failure to state an offense "if the specific facts alleged in the charging document fall beyond the scope of the relevant criminal statute, as a matter of statutory interpretation." United States v. Panarella, 277 F.3d 678, 685 (3d Cir. 2002). In making that evaluation, the court must take the factual allegations made in the indictment at face value. United States v. Roque, 2013 U.S. Dist. LEXIS 80063 at *10 (D.N.J. June 6, 2013).

Counts 4 and 7 charge violations of 18 U.S.C. § 1005. Natale asserts that the Indictment fails to allege facts which satisfy the elements of 18 U.S.C. § 1005 with respect to Counts 4 and 7. (DE 46 at 8-9 (quoting Panarella, 277 F.3d at 684).) That statute reads as follows:

Whoever makes any false entry in any book, report, or statement of [any Federal Reserve bank, member bank, etc.] with intent to injure or defraud such bank, company, branch, agency, or organization, or any other company, body politic or corporate, or any individual person, or to deceive any officer of such bank . . . or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or any agent or examiner appointed to examine the affairs of such bank . . . .

. . . .

Shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

18 U.S.C. § 1005 (emphasis added).

Natale asserts that the Indictment fails to allege a "false entry" in a "book, report, or statement" of FSB. (DE 46 at 8-9.) According to Natale, thesubscription agreement identified in Count 4 and the capital raise agreement identified in Count 7 are not "book[s]," "report[s]," or "statement[s]" within the meaning of § 1005. Though Natale does not proffer a precise definition of "books," "reports," or "statements," it appears he conceives of them as being something like FSB's "books of account," United States v. Darby, 289 U.S. 224, 226 (1933), i.e., the books that would have served as a bank's ledgers in the days before electronic filing systems.

The government responds that § 1005 sweeps broadly and is not limited to formal financial accounting records or journals.³ It relies on United States v. Foster, where the Sixth Circuit considered an inter-office memorandum in which the defendants, purporting to describe the owners of certain partnerships, failed to identify two owners in order to deceive bank officers and the Comptroller of the Currency. 566 F.2d 1045, 1052 (6th Cir. 1977). The Sixth Circuit rejected the defendants' argument that § 1005 applied only to "formal financial accounting records or journals," concluding that the inter-office memo was a "book," "report," or "statement." Id. Foster reasoned that "Section 1005 is intended to be broad enough to cover any document or record of the bank that would reveal pertinent information for the officers or directors of the bank." Id.

Natale argues that Foster is an old case which has not been cited at the Court of Appeals level "for the proposition that Courts should take an expansive view of the meaning of 'books,' 'reports' or 'statements,' for purposes of 18 U.S.C. § 1005." (DE 59 at 12.) That is not quite correct; numerous courts,with or without citing Foster by name, have adopted a similar approach to the definition of "books," "reports," and "statements."

For instance, in United States v. Chandler, the Eighth Circuit remarked that:

Section 1006[⁴] prohibits the making of "any false entry in any book, report or statement" of, inter alia, a savings and loan institution. This language appears to be "broad enough to cover any document or record of [the institution] that would reveal pertinent information for [its] officers or directors."

910 F.2d 521, 523 (8th Cir. 1990) (quoting Foster, 566 F.2d at 1052). The Chandler court concluded that it would "defy logic to conclude that a bank loan file is not such a record," and thus concluded that a bank loan officer's decision not to put a letter stating a loan was purchased "without recourse" into a loan file was an omission which constituted an "entry" into the bank's books, reports or statements. Id.; see also United States v. Weidner, 2003 WL 21183177 at *9 (D. Kan. May 16, 2003) ("the statute does not require that the entry be a formal accounting record, or a document internally created or generated by the bank . . . . the balance sheet submitted by Defendant Wittig . . . . became a bank record as part of the loan file. As such, the balance sheet was a statement that provided information to officers or bank examiners about the nature of the loan and the status of the borrower. Such a statement or record is within the parameter of § 1005"); Cable Partners Ltd. v. National Bank & Tr. Co., 1996 WL 255906 at *3 (N.D. Ill. May 14, 1996) ("A false entry under section 1005 is not limited to entries in a bank's financial accounting records, the section was intended to be broad enough to cover any document or record that would reveal pertinent information to officers or directors of the bank").

Other courts have seemingly applied broad interpretations of § 1005, while not explicitly relying on Foster. See, e.g., United States v. Brown, 898 F.3d636, 639-41 (5th Cir. 2018) (submitted false loan application is a false entry in book, report or statement); United States v. Lowe, 664 Fed. Appx. 38, 43 (2d Cir. 2016) (submitted false verification of deposit form is a false entry in a statement of a bank); United States v. Hoffman, 94 F.3d 642, 1996 WL 469901 at *5 (4th Cir. Aug. 20, 1996) (table opinion) (false entry where defendant falsely stated on loan application that he was borrowing money to renovate home rather than to provide funds for another individual). None of those Courts of Appeals required that such "entries" to be debit-and-credit entries into a bank's formal accounting records or journals.⁵

The only decision I have found in Natale's favor (and only by analogy) is L.A. Limousine, Inc. v. Liberty Mutual Insurance Co., 509 F. Supp. 2d 176, 181 (D. Conn. 2007), which evaluated a Connecticut statute with language similar to that of § 1005. Connecticut General Statute § 38a-816(5) prohibits "making any false entry in any book, report or statement of any insurer with intent to deceive." L.A. Limousine concluded that "it is evident from the title and text of § 816(5) that it is meant to apply only to financial statements and not the case at hand. An alleged misrepresentation to the state insurance commissioner as to an individual policy endorsement falls outside the intended ambit." Id. at 182. Because L.A. Limousine concerns Connecticut law, and insurance law at that, I...