The Bank Director, the Vice-President and the Disbursement of Bank Funds

This post examines an opinion from the U.S. Court of Appeals for the 3rd Circuit:  U.S. v. Bernick, 2016 WL 3141389 (2016).  The court begins the opinion by explaining that

Michael Bernick was convicted of nine counts of bank embezzlement and sentenced to 144 months' imprisonment. He now claims the District Court erred by refusing to hold a hearing on his selective prosecution claim and by applying five sentencing enhancements. 

U.S. v. Bernick, supra.  This post will not deal with Bernick’s argument concerning his sentencing process; instead, it focuses on his first argument, i.e., selective prosecution. You can read about the federal sentencing process – including enhancements – in Wikipedia’s entry on the U.S. Federal Sentencing Guidelines. You can find the Guidelines here. 

The Court of Appeals, as courts usually do, begins its opinion by explaining how, and why, the prosecution arose and by outlining the proceedings below.  As it noted,

Metropolitan Savings Bank (the Bank) was a small bank located in Pittsburgh. It consisted of one branch with space for two tellers, had approximately $1 million in capital, and was insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor. To manage the Bank's loan operations, its Board of Directors met each month to determine which loan applications to approve. On January 14, 2004, the Bank welcomed a new board member to its ranks, Michael Bernick. Throughout his tenure on the Board, Bernick served in multiple positions, including Treasurer.

At some point around his election to the Board, Bernick began a romantic relationship with Donna Shebetich—the Bank's manager, loan officer, and eventual Board Vice-President. Shebetich oversaw the Bank's day-to-day operations and helped disburse loans and complete the appropriate paperwork. About this time, Bernick also formed Keystone Residential Properties, LLC to facilitate his real estate business.

Starting in January 2005, Shebetich began disbursing Bank funds to Bernick, Keystone, and Bernick's creditors. Over the course of the next 14 months, Bernick was the beneficiary of ten disbursements totaling $402,162.95. None of these disbursements had an accompanying promissory note or was approved by the Board, and only two were entered into the Bank's computer system. With few exceptions, Bernick made no repayments. Bernick also was linked to certain undocumented disbursements given to other individuals totaling more than a million dollars.

Despite knowing of these undocumented disbursements, Bernick never disclosed them to the Bank's Board.

In early 2007, soon after the FDIC learned the Bank was insolvent, the Bank shut its doors, resulting in a loss of approximately $9.9 million, which was absorbed by the FDIC and twenty-four underinsured depositors. During its investigation of the Bank's closing, the FDIC discovered 56 undocumented disbursements accounting for nearly $2.5 million—over 200% of the Bank's capital. In an attempt to repair the damage caused by the Bank's failure, the FDIC held meetings with those who received the disbursements and asked them to sign proper loan documents.

In the course of these meetings, the FDIC interviewed Bernick. When asked if he had ever taken a loan from the Bank, Bernick failed to mention his undocumented disbursements. Only after Bernick was confronted with evidence of his disbursements did he admit to obtaining them. Finally, Bernick refused to sign agreements to repay the money he had received.

U.S. v. Bernick, supra.  If you are interested, you can read more about the facts, and court proceedings, in the case in the news stories you can find here, here and here.

The opinion goes on to explain that

[i]n 2014, Bernick was indicted on ten counts of bank embezzlement under 18 U.S. Code § 656. Soon thereafter, he filed a motion to dismiss claiming selective prosecution. Bernick neither requested a hearing nor objected to the lack of a hearing after the District Court denied his motion to dismiss. The case proceeded to trial and Bernick was found guilty on nine of the ten counts, resulting in a finding that he had embezzled $348,062.95 from the Bank.

U.S. v. Bernick, supra.   You can read more about the § 656 offense in §§ 803 and 804 of the U.S. Department of Justice’s Criminal Resource Manual, which you can find here. If you find that explanation murky, you can read about the federal sentencing process in this Wikipedia entry.

The opinion also explains that, at Bernick’s sentencing hearing,

the District Court calculated Bernick's offense level as 37, which included five sentencing enhancements: (1) 20 levels for causing a loss between $7 and $20 million; (2) two levels for committing a crime involving ten or more victims; (3) four levels for jeopardizing the safety of a financial institution; (4) two levels for abusing a position of trust; and (5) two levels for obstruction of justice. Under the United States Sentencing Guidelines (USSG), Bernick's offense level put his advisory sentencing range at 210–262 months' imprisonment. The Court granted Bernick a downward variance and imposed a sentence of 144 months' imprisonment for each count to run concurrently, five years' supervised release for each count to run concurrently, and restitution in the amount of $9,934,159.41.

U.S. v. Bernick, supra.  As is, perhaps, obvious, when sentence increments run concurrently, that reduces the total period of time the defendant has to spend in prison.

The Court of Appeals went on to note that Bernick

makes two arguments on appeal: (1) it was reversible error for the District Court to deny his motion to dismiss for selective prosecution without a hearing; and (2) the Court erred in applying the five sentencing enhancements noted above.

U.S. v. Bernick, supra.  

The court began its analysis of Bernick’s arguments on appeal with his selective prosecution argument. U.S. v. Bernick, supra.  It began by explaining that

[b]ecause Bernick neither requested a hearing nor objected when the Court denied his claim without one, we review his argument that a hearing was necessary on his selective prosecution claim for plain error. Federal Rules of Criminal Procedure Rule 51; United States v. Tai, 750 F.3d 309, 313–14 (3d Cir. 2014).

U.S. v. Bernick, supra.  

The Court of Appeals went on to explain that

[t]o warrant a hearing, Bernick needed to show some credible evidence indicating he was selectively prosecuted. United States v. Torquato, 602 F.2d 564, 569–70 (3d Cir. 1979); see also United States v. Hedaithy, 392 F.3d 580, 607 (3d Cir. 2004) (discussing the related standard for granting discovery requests under United States v. Armstrong, 517 U.S. 456, 465 (1996)).
 Bernick failed to meet this standard in two ways: (1) he did not show that someone similarly situated—a Director who received multiple undocumented disbursements and refused to sign promissory notes when confronted by the FDIC—was not prosecuted; and (2) he did not offer evidence that he was prosecuted on the basis of some unjustifiable ground, admitting that the reason he was prosecuted was `unknown to him.’ App. 34–35; see United States v. Schoolcraft, 879 F.2d 64, 68 (3d Cir. 1989). 

Accordingly, we conclude the District Court committed no error, much less plain error, in denying Bernick's motion to dismiss without a hearing.

U.S. v. Bernick, supra.  

Next, the court took up Bernick’s second argument, i.e., that the trial court judge “erred in applying the five sentencing enhancements noted above.”  U.S. v. Bernick, supra.   It began by explaining that

[a]s for Bernick's sentence, his first and most important argument is that the District Court erred when it calculated a loss of approximately $9.9 million under [U.S. Sentencing Guidelines (“USSG”)] § 2B1.1(b)(1), which resulted in an increase of 20 levels to his base offense level. According to Bernick, he caused a loss of only $348,062.95—the value of the nine disbursements he was found guilty of embezzling.

Bernick's argument is unpersuasive because it ignores the fact that he can be held responsible for the over $9 million in losses sustained by the Bank as long as he knew or `should have known[ ] [such a loss] was a potential result of the offense.’ See USSG § 2B1.1 cmt. 3(A)(iv). As the District Court found, Bernick was a Director and at one time the Treasurer of the Bank; he took nine off-books disbursements totaling $348,062.95—over 30% of the Bank's capital; he made almost no payments on these disbursements; he was aware of similar disbursements made to others; and he did not inform the Board of any of the disbursements. See App. 630–31, 698. On these facts, it was foreseeable that taking such a large proportion of the Bank's capital without telling the Board would lead the Bank to fail, causing a loss of over $9 million. The District Court did not commit clear error by finding as much. See United States v. Fountain, 792 F.3d 310, 318 (3d Cir. 2015).

U.S. v. Bernick, supra.  

The court then took up Bernick’s arguments with regard to the next two sentencing enhancements applied by the District Court Judge who sentenced him:

As Bernick acknowledges, his challenges to the next two sentencing enhancements are closely tied to the finding that he caused a loss of approximately $9.9 million.

Specifically, he objects to his two-level enhancement for committing a crime involving ten or more victims, and his four-level enhancement for jeopardizing the safety of a financial institution. With regard to the first argument, we find no error because the loss of $9.9 million was suffered by the FDIC and twenty-four individual depositors. See USSG § 2B1.1 cmt. 1 (defining `victim’ as `any person who sustained any part of the actual loss determined under [the Guidelines]’).

And by taking the undocumented disbursements and causing the Bank to fail, Bernick jeopardized the safety of the Bank by leading it to `insolven[cy]’ and rendering it unable `to refund . . . deposit[s],’ see USSG § 2B1.1(b)(16)(B)(i) & cmt. 13. There was no clear error in this regard either.

U.S. v. Bernick, supra.  

Next, the court analyzed Bernick’s fourth challenge to the enhancements, which

relates to his two-level enhancement for abusing a position of trust in a manner that “significantly facilitated the commission or concealment” of his offense. See USSG § 3B1.3. He argues that since many others who were not Directors of the Bank received undocumented disbursements, it could not be the case that his directorship played a significant role in his receipt or concealment of his disbursements. 

The District Court disagreed with this analysis, finding that Bernick had `unfettered access’ to disbursements and the ability to evade `control mechanisms’ that were meant to prevent inappropriate loans from being granted. App. 634. We see no clear error here—by virtue of Bernick's position he easily gained access to Bank funds and, perhaps more importantly, concealed the existence of his disbursements (and those of others) by not reporting them to the Board.

U.S. v. Bernick, supra.  

And, finally, Bernick objected to his

two-level enhancement for obstruction of justice for testifying that he intended to repay the disbursements. Bernick claims this testimony was truthful and akin to statements frequently made by bankrupt debtors who are unable to repay their loans. We disagree.

Bernick was hardly a typical borrower. He received disbursements outside the normal loan process, he did not sign a single promissory note, and he made almost no repayments. Despite these actions, Bernick testified that he meant to repay the Bank all along.

The jury found otherwise, determining that Bernick intended `to injure or defraud the bank,’ Valansi v. Ashcroft, 278 F.3d 203, 210 (3d Cir. 2002). Bernick's testimony as to this element of the crime cannot be reconciled with the jury's verdict. Accordingly, the District Court did not err in enhancing his sentence based on obstruction of justice. See USSG § 3C1.1 & cmt. 4(B).

U.S. v. Bernick, supra.  

The Court of Appeals ended the opinion by stating that “[f]or the forgoing reasons, we will affirm Bernick's judgement of conviction and sentence.” U.S. v. Bernick, supra.  

(If you are wondering about the photo that accompanies this post, it is, as Wikipedia explains, a photograph of Frank Andrews, who

was the police commissioner for the city of Detroit, and also a financier working as vice-president at the Detroit City Savings Bank. He embezzled over a million dollars in deposits, which he invested in copper; when the copper market slumped in 1902, the bank failed and all its depositors were ruined.)