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United States v. Eskow

decided: February 27, 1970.


Lumbard, Chief Judge, Friendly, Circuit Judge, and Mansfield, District Judge.*fn*

Author: Mansfield

MANSFIELD, District Judge:

On November 5, 1968, following a four-week jury trial, defendants Gerald W. Eskow and Fred H. Mackensen were found guilty of using the mails in furtherance of a scheme to defraud eight insurance companies in connection with loans totaling some $2,350,000 to Yale Express Systems, Inc. ("Yale" herein) in violation of Title 18 U.S.Code ยงยง 1341 and 2, as charged in 31 counts of a 43-count indictment.*fn1 They here urge that the judgments of conviction entered on December 27, 1968 be reversed on the grounds that (1) the indictment was defective; (2) there was a fatal variance between the indictment and proof; (3) the evidence of fraudulent intent and a common scheme was insufficient; (4) the trial court, after admitting certain evidence "subject to connection," improperly permitted the jury to determine whether the necessary connection had been established; (5) the trial court erred in characterizing credibility as a collateral matter and foreclosing cross-examination on certain matters. For the reasons hereinafter stated we affirm.

The mail fraud charges grow out of defendants' involvement in obtaining loans in 1964 for Yale, of which Eskow was president and Mackensen was the administrative vice-president in charge of the company's accounting department. Yale was both a holding and operating company. Prior to 1963 it had two wholly-owned subsidiaries, Yale Transport, which conducted interstate motor carrier operations, and American Freight Forwarding Corp., the name of which denotes its business. On May 1, 1963, Yale purchased 97% of the issued stock of Republic Carloading and Distributing Company ("Republic" herein), also a freight forwarder.

In March, 1964, Yale commenced negotiations through Eastman Dillon Union Securities Co. ("Eastman Dillon" herein) to borrow money and in that connection furnished to Eastman Dillon its financial statements for 1963 and also apparently for the first quarter of 1964. Eastman Dillon, in turn, forwarded these statements to prospective lenders.

Eastman Dillon was successful in securing loans totaling $2,350,000 from eight insurance companies. In the loan agreements, which were closed on September 30, 1964, Yale warranted that: (1) the financial statements covering its operations for 1963 and the first six months of 1964 (apparently not sent to the lenders) were accurate and fairly presented the financial condition of the company for the periods stated, (2) generally accepted accounting principles had been utilized in preparing the statements, (3) there had been no material changes after June 30, 1964, that would adversely affect the two financial reports, (4) nothing material had been omitted and there were no known facts that might adversely affect the future financial condition of the company.

Eskow and Mackensen made similar representations in certificates signed on September 30, 1964, the day the loan was closed. Each warranted that to his knowledge the financial statements covering 1963 and the first six months of 1964 were true, and that neither knew of anything which might have an adverse effect on the financial condition of the company as presented in the financial statements. In November, 1964, pursuant to defendants' authorization, Yale sent another financial statement to the lenders setting forth its operations for the first nine months of 1964 as required by the loan agreements.

The 1963 financial report showed a profit for that year of $1.8 million. The report for the first six months of 1964 showed a profit of $717,000. The nine-month report set the profit at $1.5 million. All of these profit figures were materially false. A reaudit done in 1965 disclosed that instead of realizing a profit in the sum of $1.8 million for the year 1963 the company had lost $1.8 million, and that it had also lost over $5 million for the year 1964. Although no precise breakdown of the loss figures for the first six- and nine-month periods of 1964 was made, a preliminary audit done by Peat, Marwick, Mitchell & Co. ("PMM" herein), independent certified public accountants, showed a six-month loss of approximately $1.5 million and a nine-month loss of approximately $1.8 million.

The gross disparity between the profit announced for the year 1963 and the loss actually sustained that year resulted largely from the omission from the 1963 financial statement of a number of substantial expenses, most of which had been incurred by Republic. As a freight forwarder Republic's principal expense was the employment of motor and rail carriers to move the freight which it had collected and consolidated. Because the carriers usually delayed submission of their bills for such transportation expenses, Republic had followed the procedure of accruing the expenses monthly on the basis of experience and then, upon later receiving the bills, allocating the actual expense back to the month in which the expense had been incurred. This adjustment of accrued to actual expense was accomplished through use of a coding system. Although an underaccrual of expenses for any month could temporarily result in an overstatement of profits for that month, a downward adjustment would be made when the actual expenses were coded.

In December, 1963, Mackensen took steps that drastically changed the foregoing system. First he instructed Irving Goldberg, the chief accountant of Republic, to make an arbitrary reduction of almost $470,000 in the transportation accrual expenses for October and November. At the same time he converted Republic to a modified cash basis of accounting, described as a "fast cut-off" method, under which a date two weeks after the end of each month was fixed as the time for cutting off expenses related to that month, even though many bills for transportation expense were not usually received until much later, simultaneously Mackensen eliminated the system of coding actual transportation expenses, thus making it impossible to allocate actual expenses, upon later receipt of invoices, back to the month in which they had been incurred so as to determine the actual profit for that month.

The arbitrary $470,000 reduction in transportation expense, coupled with the switch-over in accounting procedure toward the end of the year, was later shown to have been the cause, in very substantial measure, of the large overstatement of income for 1963. The figure was further overstated by the fact that in 1963 the Yale Transport terminal in Newark had incurred $438,000 in bills which had not been included at all in Yale's accounts. These invoices were discovered in early August, 1964, in a shoe box in the custody of Norman Goldwasser, chief accounting officer for Yale Transport. Mackensen thereupon directed that they be suppressed, resulting in an additional understatement of expenses for 1963 by approximately $400,000. Lastly, there was proof that the 1963 earnings were further inflated by the failure of Yale to write off at least a substantial part of some $791,000 in accounts receivable which had become uncollectible by 1963.

The gap of more than $2 million between the profit of $717,000 shown by Yale for the first six months of 1964 and the loss of $1.5 million sustained for the same period and the even greater discrepancy of over $3 million between the $1.5 million profit as against the $1.8 million loss for the first nine months, is attributable in large part to a few major and egregious misstatements made at Mackensen's direction. The first of these occurred in April, 1964, when a draft profit and loss statement for the first three months of 1964, prepared by Goldwasser, indicated a loss for the period of almost $600,000. Mackensen thereupon created a false profit of $273,000 for the quarter by arbitrarily eliminating $600,000 in expenses of Republic and failing to reduce Yale Transport's revenue by $440,000 owed to interline carriers. Another major falsification occurred in June, 1964, when Mackensen directed Goldwasser, who was preparing the monthly financial reports for May, 1964, to credit the company twice for $403,000 in freight revenue that had been received only once. The two items alone -- the arbitrary $600,000 reduction of expenses and the $403,000 double-counting of revenue -- falsely inflated the company's six-month and nine-month statements by over $1 million.


THE ...

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