United States v. LaBar (521 F. Supp. 203, 1981)

OPINION

MUIR, District Judge.

I. Introduction.

On March 2, 1981, a jury convicted each of the Defendants of one count of conspiracy, 18 U.S.C. § 371, twenty-one counts of mail fraud, 18 U.S.C. § 1341, and two counts of making a false statement to a government agency, 18 U.S.C. § 1001. At the close of the Government’s case, the Court granted a motion by Petroleum Suppliers, Inc. for judgment of acquittal because the Government failed to prove that any of its officers or agents acted with an intent to benefit it. The Court also granted all the Defendants’ motions for judgment of acquittal as to Count 25 because the Court determined that the letter on which that Count was based was not a false statement under 18 U.S.C. § 1001. Immediately upon the return of the jury’s verdict the Court granted the Defendants’ motion for judgment of acquittal as to the two false statement counts.

On March 17, 1981, timely motions for judgment of acquittal, a new trial, and in arrest of judgment were filed by the Defendants. On April 3, 1981, the individual defendants were sentenced to fines and suspended terms of imprisonment and fines were imposed on the two corporate defendants. Documents supporting the post trial motions were filed on April 21, 1981 and briefs in support of the motions were filed on May 1, 1981. The Government filed briefs in opposition to the motions on June 5, 1981 and the Defendants filed reply briefs on June 15, 1981. Both sides also submitted additional documents in support of their positions.

On June 4, 1981, the Defendants filed a motion seeking the production of two memoranda from the Government that the Defendants claim are material to their motion for judgment of acquittal. That motion was granted on June 30, 1981 and the parties were given until July 20, 1981 in which to file further briefs which they did. On June 15,1981, new counsel entered the case for LaBar and further briefing was permitted, which concluded on July 21, 1981 when LaBar filed his last brief. All of the post-trial motions will be denied.

II. Motion for Judgment of Acquittal.

The first of nine grounds asserted in support of the motion for judgment of acquittal is that the Government failed to produce sufficient evidence to sustain the convictions. The Defendants recognize that in ruling on their motion for judgment of acquittal the evidence must be viewed in the light most favorable to the Government, see United States v. Schmidt, 471 F.2d 385, 385-86 (3d Cir. 1972) (per curiam), and that all reasonable and logical inferences in support of the verdicts must be drawn from the evidence. See United States v. Trotter, 529 F.2d 806 (3d Cir. 1976). Utilizing that standard of review, the Court must determine whether the Government presented evidence to support a finding of guilt beyond a reasonable doubt.

Defendant LaBar Transportation Corporation was at the times relevant to the indictment one of the six largest mail hauling contractors in the United States. Among the multitude of statutory and regulatory provisions applicable to postal contractors is 39 U.S.C. § 5005(b)(1) which provides that the Postal Service with the consent of the holder of a transportation contract may adjust the compensation allowed under that contract “for increased ... costs resulting from changed conditions occurring during the term of the contract.” The Postal Service has promulgated at least two publications relating to this section. Section 19-316.21 of the Postal Contracting Manual, Government Exhibit 1.01, defines changed conditions as those over which the contractor has “little, if any control.” The Postal Service’s regional instructions, Government Exhibit 1.02, define changed conditions as those over which the contractor has “little or no control.” If a contractor experienced fuel cost increases that met those definitions of changed conditions, and if the increases amounted to 3.5% of the amount previously approved, it could seek on a monthly basis so-called one line adjustments in its contracts to cover those costs. See Government Exhibit 1.02. It is these provisions that form the basis for the Government’s prosecution of the Defendants.

It was the Government’s contention at trial that the Defendants embarked upon a scheme to defraud the Postal Service by submitting to the Postal Service records of fuel purchases by LaBar Transportation that showed prices in excess of the prices actually paid for the fuel. The Government sought to show that this scheme was executed in the following manner: The Defendants agreed in March 1977 to create a corporation to be called Petroleum Suppliers, Inc., whose sole function would be to purchase diesel fuel from suppliers who had been selling the fuel directly to LaBar Transportation. Petroleum Suppliers would then resell the fuel at increased prices to LaBar Transportation thereby providing LaBar Transportation with documentary evidence to support its requests for fuel price adjustments under its postal contracts. The Government further sought to prove that the Defendants actively misled the Postal Service as to the relationship between LaBar Transportation and Petroleum Suppliers.

The Defendants have never contended that Petroleum Suppliers was not created by them for the purpose of providing fuel to LaBar Transportation at a cost in excess of the costs LaBar Transportation had previously paid for fuel. They also do not dispute that they used the Petroleum Suppliers invoices to support their requests for fuel price adjustments. What they vehemently contest is that the Government’s evidence proved beyond a reasonable doubt that the Defendants acted with an intent to defraud the Government or with an intent to disobey or disregard the law.

From the evidence produced at trial, the jury could reasonably have concluded that Petroleum Suppliers had no legitimate business purpose. The Government’s evidence established that Petroleum Suppliers purchased fuel from the same suppliers that had previously sold fuel directly to LaBar Transportation and that it did so on credit terms no more favorable than those available to LaBar Transportation. The only new source of supply used by Petroleum Suppliers was a company in Florida to which Petroleum Suppliers turned after Colonial Oil, the company that had been selling fuel to LaBar Transportation, refused to sell to Petroleum Suppliers because in its view Petroleum Suppliers was not creditworthy. In all cases, fuel was delivered by the primary suppliers directly to LaBar Transportation’s trucks or facilities. Petroleum Suppliers simply received the invoices and billed LaBar Transportation higher prices for the fuel.

Perhaps the most probative evidence of the lack of a legitimate business purpose of Petroleum Suppliers relates to the purchase of fuel with credit cards. Some of the LaBar Transportation drivers were issued credit cards by LaBar Truck Rental, Inc., a sister company to LaBar Transportation and both wholly owned by LaBar Enterprises, Inc. which was wholly owned by LaBar. When these drivers purchased fuel on the road, the purchases were charged using the credit cards and LaBar Truck Rental was billed. LaBar Truck Rental would then send the invoices to Petroleum Suppliers which would pay the invoices and bill La-Bar Transportation a higher price for the fuel.

The Defendants, in their cross examination of the Government’s witnesses and by certain documentary evidence introduced during the Government’s case sought to convince the jury that Petroleum Suppliers had a legitimate business purpose. Among that evidence was testimony by Roger Crockford, Vice-President and General Manager of LaBar Transportation, that Defendant Conner was a “fuel professional” who was able to secure fuel when others could not do so. From this testimony, the Defendants argued that Petroleum Suppliers was a legitimate business because Conner’s abilities were available if needed to secure fuel in the event of a recurrence of supply problems that had been experienced by LaBar Transportation in the years preceding 1977. The jury, however, was free to disregard this testimony coming as it did from an interested witness. The jury was also entitled to look at the other evidence in the case and reach the conclusion that Petroleum Suppliers did nothing more than mark up invoices.

From that conclusion, the jury was entitled to draw the further inference that the price increases charged by Petroleum Suppliers had no basis and were designed to secure for LaBar Transportation increased compensation from the Postal Service. Since Petroleum Suppliers did nothing other than receive invoices from fuel oil companies, pay those invoices, and then invoice LaBar Transportation, it was reasonable for the jury to conclude that Petroleum Suppliers had no legitimate reason to charge La-Bar Transportation prices in excess of what Petroleum Suppliers paid for the fuel. Since there is no question that Petroleum Suppliers did charge LaBar Transportation more for the fuel than Petroleum Suppliers paid for it, the jury was faced with the task of determining why it did so and why La-Bar Transportation paid the invoices or dealt with Petroleum Suppliers at all.

There was evidence, Defendants’ Exhibit 4, a letter written by Defendant Romanowski to the corporate attorney for the LaBar companies, that Conner was involved in the discussions with LaBar and Romanowski leading to the formation of Petroleum Suppliers. Defendants’ Exhibit 4 also disclosed that the purpose of using Petroleum Suppliers was to increase fuel costs. LaBar Transportation was Petroleum Suppliers’ only customer during the period covered by the indictment. In addition, it was Romanowski who directed the Petroleum Suppliers bookkeeper, who was employed by La-Bar Enterprises, as to the fuel prices to be charged to LaBar Transportation. Defendants’ Exhibit 4 disclosed that the Defendants intended management fees paid by Petroleum Suppliers to LaBar Enterprises and other miscellaneous expenses to offset Petroleum Suppliers’s profits. Defendants’ Exhibit 25 disclosed that during its first year of business Petroleum Suppliers paid in excess of $82,000 in management fees out of an operating income of approximately $124,000.00. Moreover, the evidence disclosed that all of the fuel suppliers continued to deal with Romanowski and that Conner was not involved in the procurement of fuel, with the exception of the one case in which a new supplier was needed when Colonial Oil refused to sell to Petroleum Suppliers. From this evidence the jury could conclude that prices charged by Petroleum Suppliers were determined with an eye toward how those prices would benefit LaBar Transportation and LaBar Enterprises in LaBar Transportation’s dealings with the Postal Service rather than for any business purpose of Petroleum Suppliers.

Other evidence indicating control by La-Bar Transportation over Petroleum Suppliers was the history of payments from La-Bar Transportation to Petroleum Suppliers. Government Exhibit 79.01 showed a close correlation between the amount of cash paid by Petroleum Suppliers to its suppliers and the amount of cash paid by LaBar Transportation to Petroleum Suppliers. The Government argued from this evidence that LaBar Transportation’s actual outlay of cash to Petroleum Suppliers was just sufficient to permit Petroleum Suppliers to pay its suppliers for fuel and that LaBar Transportation had no intention of ever paying Petroleum Suppliers its markup.

The Defendants argued to the jury that what in fact was occurring was the extension of credit from Petroleum Suppliers to LaBar Transportation and that the payment history between the companies showed that for the most part LaBar Transportation’s payments were running anywhere from 60 to 105 days behind billings from Petroleum Suppliers. The jury could have rejected this argument because there was testimony that Petroleum Suppliers was obtaining its fuel on the same credit terms that LaBar Transportation had obtained it, namely, payment being required in 10 to 15 days and because Petroleum Suppliers did not appear to be in a financial position to extend credit to LaBar Transportation. Since LaBar Transportation was paying Petroleum Suppliers amounts that enabled Petroleum Suppliers to pay for its purchases of fuel and since those amounts were essentially equal to what LaBar Transportation had been paying for fuel prior to the creation of Petroleum Suppliers the jury could have reasonably concluded that the Government’s interpretation of the payment history rather than the Defendants’ was accurate.

The Court recognizes that this is not the only conclusion that the jury could have drawn from the evidence. There was testimony from Roger Crockford and Daniel T. McHenry, the “Administrator” of LaBar Transportation, to the effect that price negotiations between Crockford and Conner occurred during the summer of 1978. While Crockford and McHenry both testified that such discussions occurred, they placed the discussions at different times of the year. More importantly, by letter dated June 26, 1978, McHenry represented to the Postal Service that LaBar Transportation was paying one price for fuel when in fact it had not paid that price for three months and was then paying less than represented in the letter. Because of these facts and because of these witnesses’ obvious ties to the Defendants, the jury could have disbelieved their testimony about Conner setting the prices.

The evidence concerning the formation of Petroleum Suppliers, its purpose, method of operation, and the history of payments to Petroleum Suppliers were sufficient to support the inference that Conner did not set the prices that were charged LaBar Transportation and that no negotiations over prices occurred.

Based on the foregoing, the jury could have concluded beyond a reasonable doubt that the fuel prices charged by Petroleum Suppliers and the requests for fuel adjustments based on those charges were unjustified, that prices charged by Petroleum Suppliers to LaBar Transportation were determined by the Defendants for the benefit of LaBar Transportation, and that Petroleum Suppliers was controlled by LaBar Transportation and did not operate as a separate entity in its own interests. In short, the jury could reasonably have concluded that Petroleum Suppliers did nothing more than act as the nominal purchaser of diesel fuel, pay for that fuel with funds provided by LaBar Transportation for that purpose and bill LaBar Transportation for fuel at prices set at a level sufficiently high to permit LaBar Transportation immediately to seek increased compensation under its postal contracts. These conclusions alone, however, are not sufficient to support the convictions. The Government was also required to prove beyond a reasonable doubt that the Defendants acted with an intent to defraud the Government or with a bad purpose to disregard or disobey the law.

In its charge to the jury, the Court stated that intent can be inferred from the surrounding circumstances. Among those circumstances was evidence from which the jury could conclude that the entire procedure of increasing the price of diesel fuel by use of Petroleum Suppliers was nothing more than a series of paper transactions, the most blatant of which was the way in which the credit card sales were handled. In an attempt to rebut this inference, the Defendants attempted to bring before the jury advice they claimed to have received from the postal consultant, Travis Henry. One such attempt was Defendants' Exhibit 4, the letter from Romanowski to the attorney, in which it is stated that the decision to establish Petroleum Suppliers was reached after discussions with, among others, Travis Henry. In addition, the Defendants established on cross-examination of the Government’s first witness that the Postal Service had no per se prohibition against the purchase of fuel from controlled or subsidiary corporations.

The obvious intent of this testimony was to convey to the jury that the seemingly unusual method of conducting business used by LaBar Transportation and Petroleum Suppliers was permitted by the Postal Service, or so the Defendants believed. Since the jury was never presented with the substance of the advice allegedly given by Travis Henry, it was not unreasonable for it to afford little weight to the attempt by the Defendants to rebut what was a rather strong inference of intent from the actions taken by the Defendants. There was, however, more evidence of unlawful intent.

The Defendants correctly argue that no Postal Service regulation in effect at the time covered by the indictment required disclosure to the Postal Service of the relationship between LaBar Transportation and Petroleum Suppliers or required any of the Defendants to advise the Postal Service why Petroleum Suppliers was created or how it operated. The Defendants are also correct that there were only two written inquiries from the Postal Service to LaBar concerning these matters. One was a letter dated August 23, 1977, Government Exhibit 25.01, requesting “some explanation” of why LaBar Transportation was buying fuel for a route in Massachusetts from Petroleum Suppliers, a Pennsylvania company. The other was a letter also dated August 23, 1977 but from another postal official, Government Exhibit 4.01, relating that McHenry had not been able to explain why fuel was purchased from Petroleum Suppliers for a route in Massachusetts or if Petroleum Suppliers was a subsidiary of LaBar Transportation. LaBar replied by identical letters dated August 29, 1977, Government Exhibits 4 and 25 stating that the Pennsylvania company, Petroleum Suppliers, was a jobber and not a subsidiary. There were, however, other steps taken to convince the Postal Service that LaBar Transportation enjoyed no special relationship with Petroleum Suppliers.

On June 26 and July 19, 1978, McHenry, the “Administrator” for LaBar Transportation, wrote Postal Service officials in connection with fuel price adjustment requests. These letters, Government Exhibits 11 and 12, stated in essence that LaBar Transportation had been attempting to negotiate with Petroleum Suppliers for a reduction in fuel prices. As indicated above, because of the discrepancies in McHenry’s and Crock-ford’s testimony and the misrepresentation as to the price then being charged by Petroleum Suppliers, the jury could have reasonably concluded that no negotiations took place between LaBar Transportation and Petroleum Suppliers. The jury also could reasonably have concluded that the representations that they had taken place were made for the purpose of leading the Postal Service to believe that LaBar Transportation dealt with Petroleum Suppliers on an arms length basis and had no control over the prices charged LaBar Transportation by Petroleum Suppliers.

There was also evidence from which the jury could have concluded that the Defendants perceived a reason so to convince the Postal Service. Government Exhibit 8 is a letter written by LaBar to the Postal Service in which LaBar quotes a section of the postal manual relating to cost adjustments which recites that adjustments are limited to “increased . . . costs directly attributable to changed conditions. . . . ” Changed conditions are defined as those brought about by external forces over which the contractor has “little if any control...” That letter is evidence that LaBar knew that increases were not allowable if the price changes were caused by the contractor. The Defendants, therefore, had a very good reason to attempt to convince the Postal Service that they had no control over the prices charged by Petroleum Suppliers.

The knowledge by the Defendants of the Postal Service’s position that increased prices caused by the contractor were not subject to increased compensation undercuts the Defendants’ position that they believed in good faith that they could obtain cost adjustments under the circumstances that could have been determined by the jury to have existed, namely, with the Defendants setting the prices charged by Petroleum Suppliers with the view toward the benefit to LaBar Transportation rather than toward any legitimate purpose of Petroleum Suppliers. It further undercuts the Defendants’ position that they believed in good faith that they could set up Petroleum Suppliers to do nothing more than write invoices. While evidence to the effect that for a time Petroleum Suppliers and LaBar Transportation had the same mailing address, that both used bookkeeping services provided by LaBar Enterprises and that Petroleum Suppliers’s books were not in any way hidden from employees was presented and argued to the jury as evidence that the Defendants lacked an intent to defraud, that evidence was not conclusive and did not offset the other evidence in the case showing unlawful intent.

Having determined that the Government presented sufficient evidence to warrant the jury in concluding that the scheme to defraud alleged in the indictment existed, the Court must now determine whether the Government presented sufficient evidence to link any of the Defendants to that scheme. In order to sustain the convictions, the evidence must be sufficient to show that each defendant had knowledge of the illicit purpose of the scheme and took at least one step in furtherance of that scheme. Evidence of that knowledge must be clear, not equivocal. United States v. Klein, 515 F.2d 751, 753 (3d Cir. 1975).

Turning first to LaBar, Defendants’ Exhibit 4, the letter of March 28, 1977 from defendant Romanowski to the attorney Marshall Jacobson, provides evidence that as of that date LaBar was involved in the decision to establish a fuel company through which LaBar Transportation would purchase its diesel fuel. As outlined in that letter, Petroleum Suppliers would be a subsidiary of LaBar Enterprises, which in turn was wholly owned by LaBar. The desirability to LaBar of Petroleum Suppliers being a subsidiary is evident from Romanowski’s letter as well as from the testimony of Thomas Weir.

The jury could have inferred from the evidence that the purpose of forming a subsidiary fuel corporation was to insure that fuel price increases would exceed 3'/2% in a given 28 day certification period. The 3V2% level was important because until fuel cost increases reached that amount, LaBar Transportation was not entitled to an immediate cost adjustment but would have to bear the increased costs for a period of 28 weeks at which time an adjustment could be requested. Testimony of Thomas Weir, General Manager, Surface Transportation Division, U.S. Postal Service, N.T. Vol. I, at 53, 73, 92. The use of a subsidiary, therefore, would enable the Defendants to reduce the time that LaBar Transportation would have to bear the increased costs of fuel. The use of a subsidiary had another advantage to LaBar.

Postal regulations provided that at most the increased fuel costs would be covered by Postal Service dollar for dollar. Weir testimony, N.T. Vol. I at 57. In other words, if on a given route LaBar Transportation experienced a 10