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United States v. Lundstrom

United States Court of Appeals, Eighth Circuit

January 19, 2018

United States of America Plaintiff- Appellee
Gilbert G. Lundstrom Defendant-Appellant United States of America Plaintiff- Appellee
Gilbert G. Lundstrom Defendant-Appellant

          Submitted: June 6, 2017

         Appeals from United States District Court for the District of Nebraska - Lincoln

          Before WOLLMAN, ARNOLD, and GRUENDER, Circuit Judges.

          WOLLMAN, Circuit Judge.

         Gilbert Lundstrom, the former Chief Executive Officer and Chairman of the Board of TierOne Bank, was charged in a thirteen-count indictment with conspiracy to commit wire fraud affecting a financial institution, to commit securities fraud, and to falsify bank entries, 18 U.S.C. §§ 1349, 371; wire fraud affecting a financial institution, id. § 1343; securities fraud; id. § 1348; and falsifying bank entries, id. § 1005. The superseding indictment alleged that beginning in or around 2008, Lundstrom and others at TierOne devised and executed a scheme to defraud the bank's shareholders and to mislead its regulators by concealing millions of dollars in losses related to the failure of certain real estate loans. TierOne's former President and Chief Operating Officer, James Laphen, and former Senior Vice President and Chief Credit Officer, Don Langford, pleaded guilty to their roles in the conspiracy and, along with other witnesses, testified at the three-week jury trial that resulted in Lundstrom's conviction on twelve counts.

         The district court[1] sentenced Lundstrom to 132 months' imprisonment and ordered him to pay $3.1 million in restitution. Lundstrom appeals, challenging the denial of his motion for judgment of acquittal, the admission of certain evidence, the denial of his motion for a bill of particulars, the jury instructions, the application of two sentencing enhancements, the substantive reasonableness of his sentence, and the calculation of the restitution award. We affirm.


         We relate the facts in the light most favorable to the jury's verdict. See United States v. Kelley, 861 F.3d 790, 796 (8th Cir. 2017) (standard of review). TierOne, a commercial bank and financial institution, was headquartered in Lincoln, Nebraska, and historically focused its lending business on residential loans in Nebraska and nearby states. TierOne was required by federal banking laws and regulations to disclose its financial condition to the Office of Thrift Supervision (OTS), which also conducted onsite examinations at least annually and requested written responses to other periodic inquiries. Lundstrom became TierOne's president in 1994 and its CEO around 2000. TierOne became a public company in 2002, raising $200 million in capital from stock sales to investors. After becoming a public company, TierOne was also required to disclose its financial condition to the Securities Exchange Commission (SEC) by filing, among other documents, annual and quarterly reports that included financial statements audited by an outside accounting firm. As TierOne's CEO, Lundstrom was required to certify that the reports filed with the SEC did not contain any material misstatements or omissions of fact.

         Under Lundstrom's leadership, TierOne expanded its traditional residential lending business to include lending for "less conservative" commercial and construction projects, many of which were located outside TierOne's traditional midwest lending area (Turbo Assets). TierOne opened "loan production offices" around the country, whose sole purpose was to generate Turbo Assets. The Turbo Assets strategy had a dramatic impact on TierOne's loan portfolio: the bank held almost $2.5 billion in commercial and construction loans in 2005, compared to $500 million in 1999. Turbo Assets became the bank's "biggest growth sector, " while residential loans fell from 45% of the bank's loan portfolio in 2000 to only 12% in 2005.

          Although Turbo Assets originating from loan production offices in Arizona, Florida, Nevada, and North Carolina initially performed well, TierOne was also exposed to greater risk as a result of the lending strategy. These commercial and construction loans involved large sums of money that the bank would recoup only after the borrower completed its development or construction project and sold it for a price sufficient to cover the amount borrowed.[2] As the real estate markets in some of TierOne's new lending territories began to deteriorate in or around 2007, real estate prices began to decline, and the builders and developers who had borrowed from TierOne had difficulty finding buyers for their projects. When those projects did not sell, or sold at reduced prices, the borrowers were less likely to repay their loans, in which case TierOne was faced with the prospect of foreclosing on the property pledged as collateral for the loan. TierOne's portfolio of foreclosed properties grew from $18.7 million in October 2008 to $63.7 million in October 2009, forcing the bank to assume responsibility for taxes, maintenance, utilities, and general upkeep on the foreclosed properties. TierOne was also required to take "write-downs" or losses on its financial statements if the value of its loan collateral or foreclosed properties declined.

         In April 2008, the OTS conducted an onsite field visit to TierOne, following which it downgraded the bank's financial-health rating based on "problems . . . of a serious nature" in the deteriorating quality of the bank's loan portfolio. The OTS instructed TierOne to increase its "core capital ratio" to 8.5% to ensure that the bank had sufficient capital available to absorb potential losses in its loan portfolio. Lundstrom agreed in writing to maintain the 8.5% ratio. The OTS conducted a comprehensive examination of TierOne's capital and asset positions later in June 2008, which included a review of the reserves the bank had set aside to cover losses on nonperforming loans.[3] In October 2008, the OTS issued a Report of Examination (Report), concluding that TierOne's reserves were underfunded and that the bank was not employing a reliable methodology by which to calculate reserves on its nonperforming loans. The Report found that TierOne's "[a]ppraisals of land development and construction loans [were] inadequate and unsupported." Without a reliable appraisal, TierOne could not accurately value the collateral underlying a given loan and thus could not accurately value its assets in its financial reports. The Report also found that TierOne's "[m]anagement [had] failed to implement an appropriate appraisal review process" and that its methodology for calculating reserves required improvement.

         The Report identified deficiencies in TierOne's Las Vegas commercial and construction loans, noting that the bank had issued loans without appraisals or with unsupported or stale appraisals. It also observed that TierOne had exacerbated losses on certain loans by continuing to disburse funds, despite indications that a project's value had declined. The Report recommended that TierOne increase its reserves as a loan migrated toward nonperforming status. TierOne's financial-health rating was downgraded based on its "seriously weak" financial condition that threatened "the ultimate viability of the bank." Lundstrom reviewed and signed the Report.

         TierOne's Board of Directors entered into a Supervisory Agreement, "a formal enforcement action, " with the OTS in January 2009, committing to correct certain deficiencies identified in the Report. Among other commitments, TierOne agreed to allocate adequate capital for its reserves, reaffirmed its earlier commitment to maintain a core capital ratio of 8.5%, and pledged to establish procedures that would require current and well-supported appraisals on applicable loans. TierOne also acquiesced to enhanced regulatory scrutiny, in particular agreeing to prepare complete and accurate minutes of its Board of Directors meetings and to transmit copies of those minutes to the OTS. Lundstrom signed the Supervisory Agreement in his capacity as Chairman and CEO, consenting on behalf of TierOne to comply with the terms of the Agreement.

         As required by the Supervisory Agreement, TierOne hired an outside consulting firm to review its portfolio of loans exceeding $1 million. The firm recommended to Lundstrom in January 2009 that TierOne downgrade thirty loans, including the reclassification to "substandard" of nine loans totaling $130 million. TierOne rejected the recommendation, thereby avoiding the need to increase reserves by $5-7 million to account for the potential losses on the downgraded loans.

         It was against this backdrop that the government alleged that Lundstrom and other TierOne executives-President James Laphen, Director of Lending Gale Furnas, Chief Credit Officer Don Langford, and Chief Financial Officer Eugene Witkowicz-conspired to understate reserves and defer the recognition of losses associated with TierOne's nonperforming loans and foreclosed properties by delaying appraisals on the underlying collateral or the foreclosed properties. The majority of TierOne's inventory of foreclosed properties eventually had outdated appraisals and inflated values that did not reflect the impact of the downturn in the real estate market.

         Laphen testified that he, Lundstrom, and Furnas agreed on the plan to defer new appraisals to the third quarter of 2009, just before the OTS was scheduled to conduct its next onsite examination. Langford confirmed that the plan was adopted under "direction [from] the corner offices, " i.e., from Lundstrom and Laphen. Laphen explained that delaying appraisals allowed TierOne to defer the recognition of losses attributable to its nonperforming loans and foreclosed properties while management attempted to raise capital and improve the bank's balance sheet. Had the new appraisals been obtained and the resulting losses recognized, the bank would have been required to set aside additional reserves, with the result that its earnings and available capital would have decreased, which, in turn, would likely have caused the bank's core capital ratio to fall below the 8.5% mandated by the OTS. The delay in obtaining appraisals also prevented TierOne from foreclosing on additional nonperforming loans because a current appraisal was required to initiate a foreclosure proceeding.

         The government presented detailed testimony about how the plan was implemented with respect to several specific loans. When the construction loan came due in August 2008 on Towne Vistas, a 62-unit condominium project in Las Vegas, Nevada, Lundstrom and other executives agreed to extend the due date on the loan and to provide an additional $5 million in financing without a new appraisal, thereby increasing the loan balance to more than $32 million. The OTS had questioned the validity of the bank's appraisal on the Towne Vistas project in its Report, noting that the appraisal was outdated, provided an overly aggressive valuation, and had not been properly reviewed by management. TierOne falsely reported in its response that it had ordered a new appraisal and had obtained additional collateral on the project. In April 2009, Laphen received notice from the borrower that the project's value had declined so dramatically that it was worth roughly $10 million less than the amount of the loan. Laphen forwarded this notice to Lundstrom, but instead of treating the loan as "delinquent, " recognizing the loss, and increasing reserves by $10 million, Lundstrom and Laphen elected to continue disbursing loan proceeds to the borrower.

         TierOne had loaned roughly $20 million to developer Carlos Escapa for multiple Las Vegas projects. The OTS expressed concern about these loans, and Laphen responded in July 2008 that TierOne planned to foreclose on the properties.

          The foreclosure did not occur, however, and in August 2008, Laphen informed Lundstrom that Escapa had indicated that he needed an additional $800, 000 to complete the projects. In September 2008, Laphen informed Lundstrom by email that the loan funds disbursed on several of Escapa's projects exceeded the estimated sales prices for those projects. TierOne did not obtain new appraisals to verify the market value of those properties, nor did it set aside additional reserves to account for the potential losses. In February 2009, the bank was required to pay $450, 000 in outstanding taxes on Escapa's projects in order to avoid a tax lien and foreclosure by the state. Laphen testified that a potential buyer expressed interest in purchasing several of Escapa's properties. Furnas rejected the offers at Lundstrom's direction, however, because the offers were below the value TierOne was carrying on its books for these properties. The bank was "not in a position to accept this amount of loss" because it would "probably" have decreased the bank's core capital ratio below 8.5%. Langford also testified that accepting the offers would have resulted in "a loss of millions of dollars" and a requirement that the bank "set aside additional reserves." According to Langford, Lundstrom decided in May 2009 that Escapa should continue to list his properties at the inflated prices so "the foreclosure and appraisals could be pushed into the third quarter." TierOne expected to lose $6.5 million on Escapa's loans, but it did not increase reserves by that amount because its core capital ratio would have fallen below 8.5%.

         TierOne loaned $21.5 million for a Kansas condominium development called Mansions at Canyon Creek. The OTS Report indicated that the Canyon Creek loan appeared to be impaired and that "[i]mpairment analysis should be performed at maturity in October 2008 by obtaining new appraisal." Lundstrom certified in TierOne's response to the Report that the bank had "satisfied" this deficiency, but in fact had not obtained a new appraisal. On March 3, 2009, roughly one month after providing this response to the OTS, Lundstrom approved an agreement to modify and extend the loan, including a provision that "[r]eceipt of [a new] appraisal shall not be a condition of closing." When the borrowers fell roughly $500, 000 into arrears two months later, Lundstrom approved a second modification to the loan, advancing an additional $162, 000 to pay the borrower's outstanding taxes. TierOne did not order a new appraisal prior to either loan modification. By June 2009, TierOne anticipated a loss of almost $6 million on the Canyon Creek project but did not reclassify the loan as impaired because, according to Langford, it "was too big a loss to add to the bucket of losses, " and it would have reduced the bank's core capital ratio below 8.5%.

         Langford testified that after a December 2008 meeting to discuss the bank's problem loans, Lundstrom asked Furnas for an estimate of the bank's aggregate exposure in unrecognized losses. Furnas replied that the bank had $60-75 million in unrecognized losses in its portfolios. Laphen and Langford testified that around March 2009, Lundstrom directed Furnas to prepare a detailed, loan-by-loan analysis of TierOne's loan portfolio to determine a dollar figure for potential losses and the increase in reserves that the bank would "likely" have to set aside "in the next 6 months." Laphen informed Lundstrom that he was concerned about the preparation of this analysis because, if "it showed additional losses, the bank should have recognized those losses" in contravention of "the plan to not get appraisals until just before the examiners came."

         As instructed, Furnas and others reviewed each of TierOne's loan files, including outdated appraisals and outstanding balances, and Furnas prepared a spreadsheet titled, "Potential Reserve Additions Needed Due to Timing of New Appraisals." The spreadsheet provided a range of potential losses that the bank could face over the second, third, and fourth quarters of 2009, depending on the quarter in which the bank "expected to receive a new appraisal" for the collateral underlying each loan. The spreadsheet estimated that the bank would likely suffer the greatest loss and require the greatest increase in reserves in the third quarter of 2009, when the conspirators "expected to have to get new appraisals for the OTS visit." Furnas's spreadsheets stated that the bank stood to lose (and would be required to increase reserves by) a total of $35 million over the last three quarters of 2009 in the "best" case, $60 million in the "expected" case, and $113 million in the "worst" case. Langford testified that it "wasn't possible" for the bank to recover the full amount of its loans and that there was "[n]o chance" the bank could avoid recording losses and increasing reserves when new appraisals were obtained that showed substantially lower values on loan collateral. The spreadsheet also listed the date of the most recent appraisal on the collateral underlying each loan, revealing that many appraisals had not been updated since 2005 or 2006.

         Furnas told Langford that Lundstrom "didn't think that it was necessary or appropriate to present" the spreadsheet information to the Board. Furnas and Langford disagreed with Lundstrom, and Furnas presented the information during a Board meeting. Contrary to typical practice, the spreadsheet was not included in the Board's official meeting binder. Instead, Laphen and Langford testified, copies of the spreadsheet were distributed at the meeting, with Lundstrom insisting that the copies be collected after the meeting. The minutes from this meeting reported only that Furnas and Langford provided an "Analysis of Critical Loans in [the] Portfolio."

         Furnas updated his spreadsheets in May 2009 in preparation for a meeting with Lundstrom, revising the loss/reserve calculations to reflect $36 million in the "best" case, $60 million in the "expected" case, and $114 million in the "worst" case. Furnas presented the updated spreadsheet during the May 2009 Board meeting. The draft minutes from that meeting initially noted that the Board had discussed "obtaining appraisals on nonperforming loans at the present time or in a subsequent quarter." The secretary responsible for preparing the official minutes indicated in her notes, however, that Lundstrom had personally directed her to remove mention of Furnas's presentation from the official minutes. Her handwritten notes state that "Gil [Lundstrom] did not put in" any reference to the appraisal discussion. At the June 2009 Board meeting, Furnas reported that his worst-case projections "were proving to be more accurate" and that the Board should plan for that eventuality. Despite this warning, Lundstrom took no action to require TierOne to recognize the projected losses or allocate additional reserves, a course of action that would have caused the bank's core capital ratio to fall below 8.5%.

         David Frances, who was hired by TierOne in August 2008 to manage its inventory of problem loans, was concerned about the bank's outdated appraisals and delayed recognition of losses. Frances sent an email to Langford and Furnas in February 2009, expressing concern that TierOne "continue[d] to expose [itself] adversely . . . with outdated appraisals" on loan collateral whose value had declined. Frances acknowledged that the "write-downs" that TierOne would be required to recognize after obtaining new appraisals "would likely be astronomical, " but, he queried, "in good conscience[, ] how long can we continue to believe these [properties] are properly reserved?" Frances recommended that TierOne obtain an updated appraisal whenever a loan was evaluated for impairment. Laphen testified that he sent Frances's email to Lundstrom, who took no action in response to the concerns raised therein.

         Frances sent another email to Langford and Furnas on August 3, 2009, which stated that the bank "continue[d] to fail to properly risk rate [its] loans and . . . [to] refuse to update collateral valuations, out of the fear of what impact these actions may have on reserve levels." Frances wrote that he was "unable to support the timing of reappraisals to delay loss recognition or increases to the reserves into later quarters." Laphen testified that he and Furnas discussed the email in Furnas's office shortly after it was sent and that he went to Lundstrom's office immediately thereafter to deliver the information. Frances resigned a few weeks later, "frustrated" with TierOne's "unwillingness to . . . order[] new appraisals on loans that were experiencing financial difficulty, " "concerned that [the bank was] misleading the public, " and worried about his professional reputation. Laphen forwarded Frances's resignation email to Lundstrom.

          As CEO of TierOne, Lundstrom was required to certify on each of the bank's SEC filings that the "report d[id] not contain any untrue statement of material fact or omit t[o] state[] [a] material fact, " and that the statements set forth therein were "not misleading." He was further required to certify that the report disclosed "[a]ll significant deficiencies and material weaknesses in design or operation of internal control over financial reporting, " as well as "[a]ny fraud, whether or not material, that involves management or other employees" with financial reporting responsibilities. Lundstrom provided similar certifications to the outside accountants, who reviewed TierOne's financial statements prior to their inclusion in the bank's SEC filings. Lundstrom did not disclose the bank's outdated appraisals, overvalued loan and foreclosed-property portfolios, and understated reserves, despite his knowledge of these facts from Frances's emails, Furnas's spreadsheets, and discussions with other bank executives. Laphen testified that, had this information been disclosed to TierOne's outside accountants, they would have had "a great deal of difficulty certifying" the accuracy of the financial statements included in the bank's SEC filings.

         In late July 2009, as the bank was preparing its second quarter filing with the OTS, Laphen and Furnas met with Lundstrom to "go over loan loss provisions, " i.e., reserves, and provisions for foreclosed-property losses for the quarter. Lundstrom reviewed a draft of the OTS filing, which revealed that the "potential charge-offs, the charges to income, " would leave TierOne "short about $4 million" in its capital ratios and cause its core capital ratio to fall to 8.37% for the quarter. Lundstrom remarked to Laphen that the bank "couldn't afford this" outcome, which Laphen interpreted as Lundstrom's "direction to not have . . . losses that large." Laphen testified that the next day he spoke with Chief Financial Officer Witkowicz, who "had come up with an approach that would . . . allow the capital ratios to stay within compliance." Witkowicz proposed "a series of changes to small expense items" and a $3.5 million change to TierOne's unallocated reserves, i.e., the capital that the bank had allotted for general losses, but not for losses associated with particular loans. Witkowicz's plan reduced by $3.5 million the sum that TierOne had allotted for unallocated reserves. These numbers corresponded to Lundstrom's handwritten notes on the draft OTS filing. After these adjustments were made, TierOne exceeded the 8.5% core capital ratio by $309, 000, and Lundstrom certified to the accuracy of ...

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