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United States v. Southland Corp.

decided: April 23, 1985.


Appeal from a judgment of the District court for the Eastern District of New York, Charles P. Sifton, Judge, convicting The Southland Corporation and Eugene Mastropieri under a single count indictment charging these defendants and S. Richmond Dole, a Vice President of Southland, with conspiracy to commit an offense against the United States in violation of 18 U.S.C. § 1952 (the Travel Act) and to defraud the United States by impeding the functions of the Internal Revenue Service in the ascertainment and collection of income taxes.

Feinberg, Chief Judge, Friendly and Mansfield, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

The Southland Corporation, a large retailer with headquarters in Dallas, Texas, and Eugene Mastropieri, a lawyer in the borough of Queens who was a member of the New York City Council, appeal from judgments of conviction, rendered after trial before Judge Sifton and a jury in the District Court for the Eastern District of New York.*fn1 The convictions were rendered on a single count superseding indictment, charging a conspiracy in violation of 18 U.S.C. § 371, having two objectives as set forth below. Mastropieri was sentenced to 18 months in prison and Southland to a fine of $10,000.

The indictment began by alleging that there were pending before the Department of Taxation and Finance of the State of New York various cases which concerned Southland's liability for sales taxes due and owing upon the sale of merchandise through 7-Eleven stores franchised by Southland and for other reasons. It proceeded to allege that defendants conspired to travel in foreign and interstate commerce and use facilities in interstate commerce with intent to bribe state officials in violation of Article 200 of the Penal Law of the State of New York in relation to such taxes and had also conspired to defraud the United States by impeding the function of the Internal Revenue Service in determining the true nature of Southland's business expenses by causing amounts intended to be paid as bribes to such officials to appear on Southland's corporation tax return as legal fees to Mastropieri. Various steps in the conspiracy were alleged in further detail. The last overt act relating to the Travel Act objective occurred on March 27, 1978; the last overt act relating to the fraud on the United States occurred on November 24, 1980. Pursuant to a special verdict Mastropieri was found guilty of conspiring to achieve both objectives; Southland was found guilty of conspiring only with respect to the tax fraud objective.


I. Sufficiency of the Evidence

The jury could reasonably have found the facts to be as follows: Some of Southland's 7-Eleven convenience stores in New York were owned by the corporation; some were franchised. In 1977 Vice President S. Richmond Dole was headquarters executive in charge of all Southland franchise stores. The stores were divided into regions, each with its own manager. In 1977 the Northern Region Manager was Frank Kitchen. A part of that region, the Northeast Division, which included New York State, was managed by Eugene DeFalco, the Government's principal witness. In 1973 the New York Department of Taxation and Finance began proceedings against 7-Eleven franchise store operators and against Southland itself involving potential liability in excess of $1,000,000, on a legal theory which was by no means implausible. This was a considerable sum for the Northeast Division, which had had only one profitable year in its history. Also, because of bonus arrangements, DeFalco had a direct stake in the Northeast Division's earnings.

In January, 1977, DeFalco was introduced by a corporate security consultant, John Kelly, to defendant Mastropieri, a New York City councilman from Queens. DeFalco reviewed the history of Southland's problems with the Tax Commission. Mastropieri said that he knew a number of people in the sales tax bureau, including the chairman of the Tax Commission, James Tully, that "he could be of service" to DeFalco and that he would later be able to estimate the cost. DeFalco reported the meeting to Dole and to Clark J. Matthews II, Southland's general counsel. In a meeting a week later DeFalco told Mastropieri that he anticipated testifying before a judge in a formal proceeding relating to the tax dispute. Mastropieri interjected that sales tax cases were decided without formal hearings by tax commissioners who were political appointees and their aids who were professionals, and that he was very friendly with both. He explained that it would not be uncommon for the aids to mark the commissioners' agendas at the time of the hearing with indications how they should vote. After repeating that he had worked with a number of these people, Mastropieri said with a smile, "This may require heavy entertainment;" DeFalco answered "that was possible, we had entertained people before." DeFalco wanted to know what the entertainment would cost but Mastropieri deferred such inquiries.

DeFalco immediately reported to Dole that he and Mastropieri had discussed the case further, and that Mastropieri had told him "in very broad terms who he was going to work with in Albany, the bureaucrats and Mr. [Tully]." DeFalco gave it to Dole as his opinion, based on the dinner conversation, that Mastropieri "was going to be paying somebody off." Dole said, "handle it or can you handle it and take care of it."

Kelly, Mastropieri and DeFalco then sought to come up with suitable financial arrangements. Mastropieri called for $45,000 in cash, of which he was to receive $25,000 "for an up front payment or retainer" and $20,000 was to be for the expenses that [DeFalco] and he discussed." Dole advised DeFalco that it would be impossible to generate such a large sum in cash within the corporation. A second proposal was to enter into a phony airplane lease arrangement with a friend of Kelly; this ran into difficulties too numerous to be stated. Finally it was proposed that Mastropieri submit a legal bill for $96,500. Since this sum would have to come from the headquarter's accounts, this proposal was discussed, after a large sales meeting for the Northeast Division at the Hilton Hotel at Hartford, Connecticut, in the suite of John P. Thompson, Southland's CEO. The latter inquired about Mastropieri's fee. DeFalco explained it would be in the "90 to $100,000 range" and would include "entertainment." At the mention of this word Dole and DeFalco chuckled. When Kitchen complained in the hotel corridor as to what was going on, DeFalco gestured to Dole to handle him.

Shortly after the Hartford meeting Dole informed DeFalco that the Mastropieri fee would be paid from a corporate legal accrual account and how the bill should read. On July 7, 1977, Dole left with Eugene Pender, Southland's Controller, an undated bill reading as follows:


Attorney At Law

67-40 Myrtle Avenue

Glendale, New York 11227

VAndyke 1-2210-1

VAndyke 1-3612-3

Mr. Eugene A. DeFalco

c/o The Southland Corporation

425 Cherry Street

Bedford Hills, New York 10507


Balance Due October 1976 thru May 1977 $96,500.00

Dole asked that payment be expedited; when Pender asked why, Dole told him not to pursue that question any further. On the same day a check for $96,500 was made payable to Mastropieri and mailed to DeFalco. Southland took the entire $96,500 as a deductible business expense on its 1977 corporate income tax return. At the same time Southland sent an IRS Form 1099 to Mastropieri informing him that $96,500 was being reported to the IRS as a professional fee.

DeFalco sent the $96,500 check to Kelly with the note reproduced in the margin.*fn2 Kelly arranged to have Mastropieri call at his home on Sunday, July 17, 1977. Mastropieri brought with him a signed blank check on his firm's escrow account. Kelly handed him the Southland check, which Mastropieri would subsequently deposit in the escrow account. Kelly made the escrow account check payable to himself in the amount of $96,500 and later caused it to be deposited in his account at the Bank of Montreal in Toronto. DeFalco established an account in the same bank into which $20,000 was deposited by intra-bank transfer to serve as a bribery slush fund. By way of numerous checks and wire transfers, an additional $28,500 was siphoned off by DeFalco for his personal use. The $48,000 that remained in Kelly's account was earmarked as Mastropieri's compensation and to cover Kelly's additional tax liability.

Mastropieri had had an inconclusive conference on April 22, 1977 with the state tax officials. In late 1977 Mastropieri asked DeFalco to prepare a draft opinion which the Tax Commission could adopt. DeFalco obliged with an opinion that stated that "there is clear and convincing testimony on the part of Southland to the effect that in no case did it purchase the inventory . . . by repossession," when in fact there was no testimony of any sort, and that "the transfer of the merchandise inventory by the former owners to The Southland Corporation constitutes a transfer in settlement or realization of security interests which are excepted from the general requirements of Article Six of the Uniform Commercial Code and the purposes of Section 1141(c) of the Tax Law."

Events were thus proceeding according to plan when, in early August 1977, high officials of Southland received a letter from senior management announcing the establishment of a Business Ethics Review (BER) program. The cover letter was accompanied by an eight page questionnaire and an explanatory memorandum from Clark J. Matthews II, the general counsel. The questions inquired concerning knowledge of any payments to government officials to settle any disputes including tax disputes, knowledge of any payment to any government official to "grease" or expedite matters, knowledge of the existence of any off-the-book accounts or slush funds, knowledge of any laundering or other recycling of funds, etc. DeFalco called Dole, who had been one of the signers of the covering letter, and asked whether Dole had any problem with any of the questions. Dole answered that he didn't have a problem and asked if DeFalco did. DeFalco responded, "no, I don't have a problem anymore." DeFalco then answered the questions in the negative; Kitchen, after speaking with DeFalco, likewise omitted any mention of the Mastropieri matter. Pender, on the other hand, in responding to the question concerning "grease" payments to public officials, voiced his suspicion "that a payment made in the N/E Stores division to a law firm about July 1977 was inflated to cover costs other than legal fees. Dick Dole should have details."

Responsibility for supervising the BER was placed in Southland's Audit Committee, consisting of three outside directors who generally met once a month in the library of Southland's legal department. At some time during the first half of 1977, Matthews told the Audit Committee that Dole and DeFalco had approached him to pay a fee to a New York lawyer in the form of an airplane rental lease of $45,000. The Committee rejected this proposal and told Matthews to look into the matter further. As the BER got under way, Matthews took staff attorney Michael Davis on as an assistant for the project and instructed him to add the Mastropieri ...

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