Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 1 of 14

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1 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 1 of 14 UNITED STATES OF AMERICA IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS MIDLAND-ODESSA DIVISION VS. NO. MO-14-CR-001 STEPHEN HILLIARD, MICHAEL DURAINE COWAN, II, CYNTHIA GAYLE HIRSCH, BERTA LAURA MCFADDIN UNITED STATES S MOTION IN LIMINE TO EXCLUDE EVIDENCE OF DEFENDANTS REPAYMENT OF FRAUDULENT LOANS AND EVIDENCE OF NO LOSS I. Introduction Defendants have indicated an intent to introduce evidence that they have repaid many of the fraudulently obtained loans and thus, as a consequence, the banks have been or are being made whole and will not suffer any economic loss. Also, they have indicated an intent to introduce evidence that they had a good-faith belief that the scheme would ultimately be successful. Finally, the defendants have suggested that the subject loans were adequately secured inasmuch as the properties were worth what they told the bank they were worth even though that was not what they were paying for the properties. Essentially, Defendants seek acquittal under a no harm, no foul theory that is wholly unsupported in the law. The United States seeks to preclude Defendants from introducing this category of evidence because it is irrelevant to the guilt/innocence phase of the trial. Such evidence of repayment will certainly be important at the sentencing phase, but it has no place at trial.

2 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 2 of 14 II. Background From on or about March 7, 2003 to on or about August 23, 2011, Stephen Mark Hilliard, Michael Duraine Cowan, II, Cynthia Gayle Hirsch, Berta Laura McFaddin, and others, all worked together to engage in a real estate investment scheme, involving approximately 800 real properties and about $45 million in loans, to defraud multiple banks. The principal objective of the real estate investment scheme was for Hilliard and/or Cowan to purchase a specific property from A utilizing one of their respective investment companies. A first sales contract would be produced indicating A as the seller and the investment company as the buyer B. McFaddin, as the title company representative, would assist in the completion of the HUD-1 form on the A-to-B transaction. Next, Hilliard and/or Cowan would re-sell (flip) the same property at an inflated selling price on the same day to another Hilliard and/or Cowan investment company, thereby creating a fraudulent second sales contract between the seller B and the new buyer, C, which was also a Hilliard and/or Cowan investment company. McFaddin would similarly assist in the completion of the fraudulent HUD-1 form on the B-to-C transaction taking place the same day. To obtain mortgage loans or access to established lines of credit at the various banks, Hilliard and/or Cowan would submit to the bank only the documentation regarding the second, fraudulent, property sale (B-to-C) with the inflated price. In order to substantiate the inflated price on the fraudulent (B-to-C) documentation, Hilliard and/or Cowan would obtain a Broker s Price Opinion (BPO), most often from Cynthia Gayle Hirsch. Typically, Hilliard and/or Cowan would contact Hirsch and direct her to manufacture a BPO for a specific property address and further direct her to manufacture the BPO at or above a certain price so as to justify the B-to-C

3 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 3 of 14 fraudulent sales price that was to be presented to the bank for credit extension. In hundreds of instances, Hilliard, Cowan, Hirsch, and McFaddin were all aware of all of the material details of both the A-to-B and B-to-C transactions occurring on the same day. Once Hilliard and/or Cowan received the funds from the bank for the second, inflated, fraudulent sales contract, (B-to-C) they would use the monies to close on the first sales contract with the bona fide seller A at the lower selling price (A-to-B). The banks had no knowledge of the first sales contract, nor that Hilliard and/or Cowan were re-selling (flipping) the property to themselves. Consequently, Hilliard and Cowan were able to retain the difference between the price paid to A and the monies received from the bank based upon the B-to-C sales contract by providing false and materially misleading information to the bank. III. Argument & Authorities The new Fifth Circuit Pattern Jury Instructions (Criminal) issued in 2012 set forth the elements for bank fraud, which is Count One in the pending Indictment: First: That the defendants knowingly executed a scheme or plan to obtain money or property from certain banks by means of false or fraudulent pretenses, representations, or promises; Second: That the defendants acted with a specific intent to defraud the specified banks; Third: That the false or fraudulent pretenses, representations, or promises that the defendants used were material; Fourth: That the defendants placed the financial institution at risk of civil liability or financial loss; and

4 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 4 of 14 Fifth: That the specified banks were insured by the Federal Deposit Insurance Corporation. (5th Circuit Pattern Instruction 2.61.) Nowhere in the elements of bank fraud (or money laundering) is there a requirement that the United States prove that the banks suffered an actual loss, nor must the United States prove that Defendants engaged in this scheme with the subjective belief that it would ultimately fail. Also, the elements do not require proof that the property values were substantially below the price that Defendants told the banks they were paying to acquire the properties. Yet Defendants have indicated an intent to introduce all three related types of evidence. A. Repayment or lack of loss is irrelevant to the charges of Bank Fraud and Money Laundering [P]roof... that the victim sustained a loss is not a requirement under 1344 [bank fraud]. United States v. Mangano, 11 F.3d 853, 858 n.8 (9th Cir. 1993). Instead, it is merely the risk of loss or risk of civil liability that is an element. 1 United States v. Saks, 964 F.2d 1514, 1519 (5th Cir. 1992) ( risk of loss... is all that is required under ) (emphasis added). Similarly, loss to investors is not an element of either mail fraud or securities fraud, nor is intent to cause loss. United States v. Hickey, 580 F.3d 922, 931 (9th Cir. 2009). Accordingly, evidence of repayment or lack of loss to the banks is irrelevant and should be excluded from the trial. District courts do not abuse their discretion when a defendant is precluded from presenting evidence of 1 Count Two charges Defendants Hilliard and Cowan with engaging in a conspiracy to commit money laundering. The pattern jury instruction for one of the two charged money laundering objects is 2.76 (concealment). There is no pattern instruction for the money laundering object in Regardless, neither crimes requires proof of loss because they reference back to the specified unlawful activity, which in this case is the bank fraud, which only requires proof of risk of loss.

5 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 5 of 14 repayment because such evidence is irrelevant to the mens rea. United States v. Van Elsen, 652 F.3d 955, 958 (8th Cir. 2011). The evidence of any repayments interjects considerations extraneous to the merits of the case. It is certainly possible the jury could sympathize with the defendants and base their decision upon the fact that full restitution and interest has been made to the banks and therefore there has been no harm, no foul. The potential for abuse of this sort of evidence should lead to its exclusion from the trial because no other curative measure could prevent the effect this evidence would have on the jury. Any probative value it could possibly have is substantially outweighed by unfair prejudice, confusing the issues, and misleading the jury, and thus the evidence should be properly excluded as not relevant under Federal Rule of Evidence 401 and 402, as well as overly prejudicial under FRE 403. Specifically, Defendants should be prohibited from making any reference to the payments made in any form in openings, closings, and in direct or cross-examinations. Indeed, caselaw from every circuit to have addressed this issue is uniform: Repayment is not a defense to fraud. The Seventh Circuit, in United States v. Spirk, an investment fraud case, held that the district court should have excluded evidence concerning defendant s belief that his investors eventually would have been repaid: The law requires people to tell the truth, so that their trading partners may decide for themselves which investments to make and which goods to buy or sell. People who want to raise money cannot obtain it by deceit and then try to persuade a jury that their intentions were good; a license to lie with a good heart would expose people to far too much risk and deny them the option of making intelligent and autonomous choices on their own behalf. Spirk, 503 F.3d 619, (7th Cir. 2007). The Spirk court further explained

6 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 6 of 14 that [t]he lie exposes the bank to a materially greater risk of nonpayment than the lender knew it was accepting, and the creation of this risk by deceit is a crime even if the borrower plans to repay indeed, even if the borrower actually repays. Id. at 622 (emphasis added). See also United States v. Masquelier, 210 F.3d 756, (7th Cir. 2000) (affirming order granting government s motion in limine to bar defendant from introducing evidence that he did not intend to cause a loss in the long-run and explaining that it has been the rule for a thousand years of criminal law that it is irrelevant in a fraud prosecution that the defendant sincerely believed that he would ultimately be able to return the victim s money after his scheme succeeded ). Likewise, the Sixth Circuit, also in a wire fraud case, held that intent to repay cannot negate the act of misrepresentations. United States v. Daniel, 329 F.3d 480, 488 (6th Cir. 2003). In Daniel, the defendant argued that the specific intent necessary for conviction must be to actually injure or harm the victim, and while he intended to deprive the victims of money in the short-term by taking improper loans, he had every intention of paying the loans back and thereby benefitting the victims in the long-term. Id. The Sixth Circuit wholesale rejected such a defense, observing that neither law nor policy supports this approach because it asks the jury to look beyond the defendant s bad conduct to his overall motives. Id. Instead, the Daniel court held, it is enough that the defendant by material misrepresentations intends the victim to accept a substantial risk that otherwise would not have been taken. Id. That is precisely this case: The banks extended loans they otherwise would not have, and they only did so because the defendants lied about the sales price of the properties. The fact that the defendants found ways to repay the banks e.g., substantial gifts from family members does not absolve them of the underlying bad conduct that helped them obtain the loans in the first

7 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 7 of 14 instance. Indeed, the defendants arguably could have asked the seemingly beneficent father with substantial wealth to extend them the loans in the first instance. But they preferred to put taxpayers money at risk by defrauding a federally insured bank than put a family member s money at risk. The Fifth Circuit is no different. As far back as 1969, our Court of Appeals has held that the intent to return money is not material to a defendant s guilt. In United States v. Withrow, a fraud case involving the misappropriation of postal funds, the Fifth Circuit expressly held that it is no defense that [the defendant] intended to return the money. Withrow, 420 F.2d 1220, 1224 (5th Cir. 1969). The Fifth Circuit further explained that criminal intent in such a fraud context does not mean that the defendant had the intent permanently to deprive the victim of the money. In other words, [w]hether or not the [defendant] hopes, expects or intends to return the money... is not material in deciding the question of guilt or innocence. Id. at Instead, the mere use of the money constitutes the crime. Id.; see also United States v. Lester, 541 F.2d 499, 503 (5th Cir. 1976) ( We adhere to those cases that consistently hold that the intention to replace missing funds does not remove the intent necessary for conviction. ). In United States v. Benny, the court of appeals affirmed a jury instruction in a mail fraud case in which the trial court stated that [n]either an honest belief by the defendant in the ultimate success of a plan nor the actual or intended repayment of the loan is itself a defense. Benny, 786 F.2d 1410, 1417 (9th Cir. 1986) (emphasis added). Thus, Defendants in this mortgage fraud case may neither present evidence that they believed that their scheme would result in no loss to the banks, nor may they present evidence that they were successful in paying back the loans. In a very recent wire fraud case, the Ninth Circuit affirmed the district court for excluding evidence of the

8 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 8 of 14 defendant s good faith effort to repay the monies he misappropriated because such effort and such an intent is not a defense to fraud. United States v. Namvar, 498 F. App x 749, 750 (9th Cir. Mar. 26, 2013) (citing Benny). Just as in the Fifth, Sixth, Seventh, and Ninth Circuits, the Fourth Circuit, in United States v. Curry, rejected a defendant s assertion, in a mail and wire fraud case, that his repayments suggested good faith. In Curry, the defendant engaged in a scheme on ebay in which he purported to have gold coins available for sale. Curry, 461 F.3d 452, (4th Cir. 2006). In one instance, a buyer complained to the defendant when his check was cashed and the coins were not delivered. The defendant actually refunded the victim s money and paid the victim approximately 10% more than he originally received. Nonetheless, the court of appeals held such subsequent refunds cannot absolve him of responsibility for consummated acts of fraud. Id. at 458. That is essentially what happened in the instant mortgage fraud case. The defendants repeatedly lied to multiple banks in order to obtain loans, quietly taking money they did not deserve by never revealing the true nature of the real estate transactions. But now that they have been caught with their hands in the cookie jar, they are eager to shout from the rooftops that they have repaid all the money they stole. Such post-hoc acquisition of a conscience does not excuse the initial lie. See United States v. Rossomando, 144 F.3d 197, 201 (2d Cir. 1998) ( where a defendant deliberately supplies false information to obtain a bank loan, but plans to pay back the loan and therefore believes that no harm will ultimately accrue to the bank, the defendant s good-faith intention to pay back the loan is no defense because he intended to inflict a genuine harm upon the bank, i.e., to deprive the bank of the ability to determine the actual level of credit risk and to determine for itself on the basis of accurate information whether, and at what price, to extend

9 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 9 of 14 credit to the defendant ); see also United States v. Dinome, 86 F.3d 277, 280, 284 (2d Cir.1996) (holding that intentionally supplying false information on mortgage application was proper basis for mail fraud conviction because it deprived bank of right to control its assets and diminished the ultimate value of the [mortgage] transaction to the bank as defined by its standard lending practices ). B. This Court should preclude evidence that loans were good or adequately secured To the extent Defendants attempt a nuanced version of the repayment argument by suggesting that the loans were adequately secured because the properties were worth what they claimed in the loan applications, that evidence also should be excluded because the cases are similarly uniformly against the defendants position. The Fifth Circuit, for example, in United States v. Saks, addressed the defendants argument that they could not have committed bank fraud because the loan they obtained was secured by real property that was worth the loan value and because they accepted the legal obligation to repay the loan. Saks, 964 F.2d 1514, 1519 (5th Cir. 1992). That is the same argument the defendants in the instant case make: Though they lied about material matters such as how much they were actually paying for the properties, the homes were worth what they told the banks they were paying for them. The Fifth Circuit in Saks, however, has already rejected such an argument as a defense to bank fraud, holding that [t]he fraudulent loan transaction plainly exposed [the banks]... to a risk of loss, which is all that is required under Id. (emphasis added). Likewise, in United States v. Walker, a bank fraud case, the trial court precluded, as irrelevant, the defendant from attempting to prove that he lacked an intent to defraud or injure the bank by proving that his coconspirators, who also signed the loans, were good credit risks and

10 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 10 of 14 understood their obligations to repay the loans. Walker, 871 F.2d 1298 (6th Cir. 1989). The court of appeals affirmed the trial court s exclusion of such a defense as irrelevant. The Walker court explained that the fact that the loans were otherwise good loans because the cosigners were creditworthy and would repay is irrelevant because the defendant himself personally benefited from the transactions at issue. The same is true in the instant case. The fact that some of the loans were good in the sense that they were adequately secured by a property of the same value as the loan or that the banks believed that a creditworthy family member would make good on any loan they extended to Defendants is irrelevant and should be excluded as such. The fact remains that each defendant personally benefitted from the lies told to the bank. See United States v. Henderson, 19 F.3d 917, (5th Cir. 1994) (adopting reasoning of Walker and holding that creditworthiness of cosigner was irrelevant to the misapplication of bank funds charge against [the defendant] ); Saks, 964 F.2d at 1519 (holding that financial well being of borrower does not prevent conviction for bank fraud). The policy reason behind such a holding is self-evident: Wealthy liars should not escape criminal liability where destitute liars would not. Therefore, this Court should preclude Defendants from suggesting, arguing, or introducing evidence that the loans were adequately secured. C. Good faith belief in the success of the scheme is not a valid defense Yet another variation of the same no harm, no foul defense is that Defendants might attempt to distract the jury by suggesting that they fully and genuinely intended for the scheme to be successful in the long term. Again, this type of good faith, even if genuine, is not relevant to the basic elements of bank fraud and money laundering, and courts routinely preclude such evidence and instruct jurors to ignore such evidence that seeps into the trial.

11 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 11 of 14 In United States v. Hickey, a securities and mail fraud case, the Ninth Circuit affirmed the trial court s exclusion of expert testimony that had law enforcement not intervened, the scheme would have been financially successful. The court of appeals explained that even if the defendant genuinely believed that his investment scheme would be profitable, he was still guilty of fraud because he lied to investors about the risks associated with his plan. Here, Defendants lied to the banks about the risks associated with the loans being extended because the banks believed they were loaning approximately 80% of the purchase price, when in fact they were often loaning in excess of 100%. The Fifth Circuit, in United States v. Townley, a mail fraud case, held that no amount of good-faith intent to deliver and good-faith belief in the ultimate success of the business could constitute a good-faith defense exculpating [the defendant] from criminal liability for his false and misleading statements. Townley, 665 F.2d 579, 585 (5th Cir. 1982). In other words, Defendants cannot assert that they genuinely believed that they would be able to repay the banks, and then show the jury how they did in fact repay the banks. See also United States v. Diamond, 430 F.2d 688, 691 (5th Cir. 1970) ( The trial court was correct in stating that an honest belief in the ultimate success of the project is not in itself a defense. This is clearly the holding of this Circuit. ). The law is so clear on these points that trial courts routinely issue jury instructions to ensure that a jury is not misled by any evidence or argument that could be construed as exculpating a defendant s criminal intent to defraud based upon honest belief in the success of the scheme or intent to repay. For example, the Fifth Circuit, in United States v. Peterson, a securities fraud case, affirmed a jury instruction that stated that [n]o amount of honest belief on the part of the defendant that the investment will ultimately succeed will excuse misrepresentations or omissions

12 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 12 of 14 of material fact made with the intent to obtain money or something of value. Peterson, 101 F.3d 375, 383 n.8 (5th Cir. 1996). Similarly, the Ninth Circuit, in United States v. Molinaro, a bank fraud case, affirmed a jury instruction that stated that a defendant s belief that the victim of the fraud will be paid in the future or will sustain no economic loss is no defense to the crimes charged in the indictment. Molinaro, 11 F.3d 853, 863 (9th Cir. 1993) ( a good-faith belief that the victim will be repaid and will sustain no loss is no defense at all ) (quoting Benny, 786 F.2d at 1417). IV. Conclusion The Court should preclude the defendants from introducing any such evidence at trial and from seeking acquittal on these bases. Specifically, the United States requests an express Order that instructs all defendants, their counsel and their witnesses that they are not permitted to make any reference in front of the jury to the fact that all or part of the fraudulently obtained loans were paid back. Additionally, they should not be permitted to make any reference in front of the jury to the fact that some of the individual properties might have been worth the amount stated in the Broker s Price Opinions and thus adequately secured. Finally, they should not be permitted to make any reference in front of the jury to the fact that they had an honest belief that the scheme would actually result in no loss to the banks. Respectfully submitted, ROBERT PITMAN UNITED STATES ATTORNEY By: /s/ Austin M. Berry AUSTIN M. BERRY Assistant United States Attorney 400 West Illinois, Suite 1200

13 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 13 of 14 Midland, Texas FAX Certificate of Service I hereby certify that a true and correct copy of the foregoing was filed Friday, April 18, 2014 via CM/ECF, which will cause a copy to be sent to Defendants Attorneys: Hal Brockett Attorney of record for Defendant Stephen Hilliard William R. Turner Attorney of record for Defendant Stephen Hilliard Charles M. Meadows, Jr Attorney of record for Defendant Michael Cowan, II E. Jason Leach Attorney of record for Defendant Michael Cowan, II Jason Brent Freeman Attorney of record for Defendant Michael Cowan, II David P. Zavoda Attorney of record for Defendant Cynthia Gayle Hirsch Richard Alvarado Attorney of record for Defendant Berta Laura McFaddin /s/ Austin M. Berry AUSTIN M. BERRY Assistant United States Attorney

14 Case 7:14-cr RAJ Document 68 Filed 04/18/14 Page 14 of 14 UNITED STATES OF AMERICA IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS MIDLAND-ODESSA DIVISION VS. NO. MO-14-CR-001 STEPHEN HILLIARD, MICHAEL DURAINE COWAN, II, CYNTHIA GAYLE HIRSCH, BERTA LAURA MCFADDIN ORDER After due consideration, the Court finds the United States s Motion In Limine meritorious, and Orders as follows: Defendants are instructed not to make any mention in opening or closing statements, nor introduce documentary evidence or elicit testimony on the following issues: First, that the banks have been or are being repaid; Second, that the property prices told to the banks were commensurate with a fair market value of the property at the time of the loan such that the loans were adequately secured by the property; and Third, that the defendants had an honest belief that the banks would ultimately be repaid. SIGNED this day of, THE HON. ROBERT JUNELL UNITED STATES DISTRICT JUDGE