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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 93-2877
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
JOHN "JAY" F. BAKER, JR., JAMES A. GILBERT,
and TRENTON L. TORREGROSSA, JR.,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Texas
(August 2, 1995)
Before REYNALDO G. GARZA, HIGGINBOTHAM, and PARKER, Circuit Judges.
ROBERT M. PARKER:
Appellants John "Jay" F. Baker, Jr. (Baker), James A. Gilbert
(Gilbert) and Trenton L. Torregrossa, Jr. (Torregrossa) appeal
their convictions for bank fraud and related charges. We reverse
in part and affirm in part.
I. PROCEEDINGS BELOW
Baker, Gilbert and Torregrossa were indicted on charges of
bank fraud in violation of 18 U.S.C. § 1344 (Count Two),
misapplication of funds in violation of 18 U.S.C. § 657 (Counts
Three - Twelve), knowingly making false entries in the books and

reports of a savings and loan, and unlawfully participating in loan
proceeds in violation of 18 U.S.C. § 1006 (Counts Thirteen -
Sixteen), and conspiracy to violate these statutes in violation of
18 U.S.C. § 371 (Count One). The indictment concerned conduct that
began in December 1985, and continued through October 1987. After
a two week trial the jury returned its verdict, finding Gilbert and
Baker guilty on all charges, and finding Torregrossa guilty on
Counts One, Two, Three, Four, Eight, Ten, Twelve, Fourteen, Fifteen
and Sixteen.

II. FACTS
Cornerstone Savings Association (Cornerstone), a federally
insured savings and loan association in Houston, Texas, began
operations in November 1985. Gilbert was chairman of the Board of
Directors and owned approximately 70% of Cornerstone's stock. He
signed a net worth maintenance agreement that guaranteed that he
would make up any short fall in Cornerstone's net worth from his
personal funds. He had been a builder and developer in the Houston
area in the early 1980's. He was actively involved in the day to
day operation of Cornerstone, and virtually every major decision
required his approval.
Baker was a former football coach, a licensed Texas real
estate broker, and original member of the Board of Directors of
Cornerstone. He had met Gilbert in 1978 in connection with a real
estate transaction. Torregrossa, a certified public accountant and
licensed Texas real estate salesman introduced to Gilbert during
the process of recruiting the original directors of Cornerstone,
2

served as a Cornerstone director from the beginning until April
1987. Torregrossa worked during this period as a real estate agent
on behalf of Jay Baker & Co., a real estate brokerage company owned
and operated by Baker.
Robert Lightfoot (Lightfoot), a certified public accountant,
was the original president of Cornerstone, and also served on the
Board of Directors. Lightfoot, along with Gilbert and Baker,
served on Cornerstone's loan committee during this time period as
well. He had no previous connection with the others, and was
selected after an interview process because of his extensive
experience in the savings and loan industry. Lightfoot was not
indicted and testified at trial as one of two primary government
witnesses.
In the late 1980's Houston was experiencing an economic slump
that depressed the residential real estate market. Gilbert devised
a plan for Cornerstone to purchase residential lots in partially
completed subdivisions below their appraised value and realize a
profit by providing financing for the initial lot purchase, the
subsequent construction of single family houses, and eventually the
sale of the completed homes to individuals and families. To effect
this plan, Cornerstone formed the Monogram Group (Monogram), a
wholly owned subsidiary of Cornerstone to market the completed
houses. Builders who wanted to purchase lots and participate in
the Cornerstone project joined Monogram. Many of the builders who
joined Monogram had credit problems due at least in part to the
depressed Houston housing market, and would have had trouble
3

finding financing from other sources.
Baker and Torregrossa negotiated the original lot purchases --
Baker naming "Amstar Investments, Inc." as the buyer; Torregrossa
naming "Torregrossa, Trustee" as the buyer. After each transaction
was approved by the Cornerstone Board of Directors, the contract
was assigned by the named buyer to Cornerstone. Next, Cornerstone
entered into contracts with one of the approximately fifty Monogram
builders to buy the lots. At closing, the builder typically
received one lot deeded directly to him from the seller for no
additional consideration for each two lots purchased. The builder
then borrowed money from Fallbrook National Bank, secured by the
lots received from the seller, and paid these loan proceeds to
Cornerstone as down payment. The builder borrowed the remaining
80% of the sales price from Cornerstone, secured by the lots deeded
from the seller to Cornerstone to the builder. The proceeds from
the 80% loans never left Cornerstone, as Cornerstone was both the
seller and the mortgage holder. These transactions involved
approximately 1,224.5 lots. Of these, 249 lots were deeded
directly from the sellers to the homebuilders, 930 lots were sold
to homebuilders through Cornerstone's 80% financing plan, and the
remaining lots were sold to builders and financed 100% by
Cornerstone, or were held in Cornerstone's real estate inventory.
Cornerstone purchased the lots for approximately $13 million
and booked a profit by reselling them to the homebuilders for
approximately $20 million. The contracts provided for a real
estate commission of 3% - 6% to be paid to Jay Baker & Company,
4

which amounts were customary in the real estate industry, and were
paid through the title company at the time of closing. Baker,
Torregrossa and others associated with Jay Baker & Company
performed the work normally performed by a real estate agent, and
received compensation in the form of commissions. The commissions
were transferred to Amstar, another company owned by Baker.
Torregrossa ultimately received over $300,000 in commissions from
Amstar for his role in the transactions. Baker, through Amstar,
received approximately $500,000. Gilbert held an office in Amstar
and received approximately $842,000 in what he termed "officer
fees" for evaluating the various groups of lots for Amstar, in
addition to the compensation he received from Cornerstone for
performing similar functions. The government characterized these
payments as "commissions," but Gilbert and Lightfoot both testified
that Gilbert received no commissions from Amstar. The real estate
commissions paid by Cornerstone were disclosed to Cornerstone's
Board of Directors and to the regulators.
In December 1986, the FHLB conducted a field visit at
Cornerstone and raised concerns about the commissions paid to
Baker, because they gave the appearance of a conflict of interest
in violation of § 571.7 of the insurance regulations.
Cornerstone's Board of Directors responded, defending its policies
and actions and pointing out that Torregrossa as well as Baker had
received commissions. Further, Gilbert met with Baker and
Torregrossa and the three decided that both Gilbert and Torregrossa
would give up their positions as directors to avoid any question
5

about their compliance with the regulations.
In the summer of 1987, Karen Armitige (Armitige), an examiner
of the Federal Home Loan Bank Board (FHLBB), conducted an
examination at Cornerstone. While going through the transaction
files for the lot purchases, she found that some files contained
two sets of earnest money contracts and title policy commitments.
One set listed a larger number of lots than the other set without
a corresponding difference in the total purchase price for the
properties. She and her assistants also found that the builders
were making substantial down payments and establishing interest
reserves. This fact raised questions because the builders' overall
financial condition seemed weak and their bank balances did not
appear sufficient to cover the down payments and interest reserves.
Armitige asked one of Cornerstone's secretaries where the down
payment funds had come from, and was given photocopies of the
Fallbrook National Bank cashier's checks. She then took the files
and the photocopies of the checks to Lightfoot, and asked for his
help in understanding the transactions documented in the files. He
told her he did not know, but would check with Gilbert and get back
to her. Lightfoot told her the next day that Gilbert had taken the
files to organize them. When Gilbert returned them to Armitige,
only the documents reflecting the smaller number of lots were left
in the files, because, as Lightfoot explained to her, those
documents accurately reflected the number of lots actually
purchased by Cornerstone.
Armitige testified that while doing research for a personal
6

project in the real estate deed records at Harris County Courthouse
during the same time frame she ran across transactions deeding lots
directly from the sellers to the Monogram builders. Again she went
to Lightfoot and asked him to explain the transactions. He
explained the program to Armitige in full. Armitige testified that
once she understood the transactions, she was concerned that
Cornerstone was "giving away institution assets."
Lightfoot's testimony generally agreed with Armitige's
recitation of the transactions, but assigned a different motive to
the players. Lightfoot testified that Gilbert planned to increase
the value of Cornerstone as quickly as possible and then sell his
interest in it. In Lightfoot's view, the problem with the plan was
not that the builders received a windfall, but that Cornerstone
inflated its own value by booking an instant profit from the sale
of the lots at almost double their purchase price to high risk
borrowers. In short, Lightfoot was critical not of the underlying
transaction, but of the accounting procedures used in recording
them.
Under Regulatory Accounting Principles (RAP), Cornerstone
could have financed 100% of the lot loans and booked a profit at
the inception of the loan. Under Generally Accepted Accounting
Principles (GAAP), Cornerstone could not book a profit on a loan
until it was paid in full unless the borrower made a 20% down
payment. The down payment requirement allowed less risky loans to
show as present profits, and riskier loans to show as potential
future profit. The down payments from Fallbrook decreased
7

Cornerstone's risks, because the institution held 20% cash, and 80%
real estate, instead of 100% real estate in a volatile market. The
20% down payments from the builders reduced Cornerstone's risk and
allowed Cornerstone's books to reflect the highest possible value
for a potential sale of the institution. Gilbert and the other
directors of Cornerstone wished to satisfy the examiners that
Cornerstone's risks were acceptable for federal insurance purposes,
and the down payments were one element in their compliance with the
regulations requirements.
Lightfoot testified that Gilbert said that he did not want the
examiners to know that the down payments came from Fallbrook,
because several of Cornerstone's directors also owned stock in
Fallbrook. However, it was undisputed that Lightfoot and other
Cornerstone employees disclosed this information to the examiners,
and Fallbrook's involvement was clear from Cornerstone's records.
The central question in this appeal is whether Appellants'
compensation, the real estate program itself and the accounting
decisions made by the defendants were crimes, or whether they were
merely an aggressive and complex marketing program designed to reap
a legal profit in a risky market.
III. SUFFICIENCY OF THE EVIDENCE
a. Standard of review.
All three defendants challenge the sufficiency of the evidence
to support their convictions. We must decide whether a rational
jury could find that the evidence established guilt beyond a
reasonable doubt on each count of conviction. United States v.
8

Frydenlund, 990 F.2d 822, 824 (5th Cir. 1993). Every reasonable
hypothesis of innocence need not be excluded by the evidence. Id.
We view all reasonable inferences and credibility choices in the
light most favorable to the jury's verdict. Id.
Sufficiency of the evidence in this case is not so much a
question of credibility determinations, which are constitutionally
entrusted to the jury and entitled to great deference, see Jackson
v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 2789, 61 L.Ed.2d 560
(1979), as a mixture of fact and law: whether the actions and
choices of defendants surrounding this real estate venture were
proscribed by criminal statutes.

b. Bank fraud and misapplication.
Appellants were charged in Count Two of the indictment with
Bank Fraud in violation of 18 U.S.C. § 1344 and in Counts Three
through Twelve with Misapplication of Funds in violation of 18
U.S.C. § 657. Count Two charged Appellants with executing a scheme
to defraud Cornerstone by "causing Cornerstone Savings to purchase
1224.5 residential lots and giving away 249 of the residential lots
without compensation to Cornerstone Savings." Similarly, each of
the misapplication counts charged Appellants with causing
Cornerstone to pay for lots in a specific subdivision, which lots
"were given to various builders without compensation to Cornerstone
Savings." Accordingly, all eleven of these counts require proof
that Cornerstone purchased and then disposed of the lots deeded
directly from the developers/sellers to the builders without
compensation. Appellants ask us to reverse their convictions
9

because proof at trial established that the lots passed to the
builders only in combination with transactions where the builders
purchased other lots at substantial profit to Cornerstone. They
dispute the Government's contention that Cornerstone's assets were
given away, because the overall effect of the transactions was a
substantial profit to Cornerstone. We agree.
Citing United States v. Saks, 964 F.2d 1514 (5th Cir. 1992),
the Government contends that the evidence supports the convictions
because Appellants had a specific intent to deceive, for the
purpose of causing some financial loss to another or bringing about
some financial gain to themselves. See id., at 1518.
In Saks we
affirmed a conviction under § 1344 based on evidence that the
defendants, who were loan customers of the banks involved,
defrauded federal regulators by concealing the involvement of
another party in the loan transaction, as well as defrauding the
banks of their money. The bank officers were not only aware of the
scheme, but devised it in order to satisfy the regulators'
insistence on their need for capital infusion, then convinced the
defendant/loan customers to go along. The defendants claimed that
there was insufficient evidence of a scheme to defraud the banks,
because the bank officers knew about the plan, and the intent was
to deceive the regulators. We rejected that argument, holding that
the financial institution itself -- not its officers -- was the
victim of the fraudulent scheme and that the officers' collusion in
the crime did not excuse the defendants' fraudulent act of
executing loan papers that concealed the true parties to the
10

transaction.
The Government attempts to bring this case under the purview
of the Saks holding by offering examples of evidence that they
contend proved that Appellants were not forthright in every aspect
of their dealings. First, they argue that the jury could have
inferred from confusion in the testimony of director Clint Hackney
that the Board of Directors was not fully cognizant that Appellants
were profiting from the commissions paid on the loan proceeds. It
is beyond dispute that the directors were aware of the customary 6%
real estate commissions paid in the lot transactions. Further, the
conflict of interest policy that allowed such payments to the real
estate company owned by Baker was adopted by the board. The
regulators knew about these payments at least as early as the
December 1986 field visit, and there was no evidence that the
payments were concealed before or after that visit. Clint
Hackney's ostensible confusion on the witness stand does not
establish that Cornerstone's directors were unaware of the real
estate commissions in the context of this record. Second, the
Government points to the payments from Amstar to Gilbert
denominated "officer fees." This evidence establishes a possible
conflict of interest between Gilbert's goal of immediate personal
gain and his goal of achieving profit for Cornerstone which,
because he owned 70% of Cornerstone's stock, is perhaps accurately
called long term personal gain. It is also evidence of another
crime, discussed below. However, such evidence cannot substitute
for evidence that Cornerstone was not compensated for its interest
11

in the 249 lots. Third, they point to testimony that Gilbert told
Cornerstone personnel to conceal any reference to Fallbrook's
involvement with the Monogram sales transactions. This evidence,
likewise, does not inform the question of whether or not
Cornerstone was adequately compensated.
Saks involved an executed loan document that everyone agreed
failed to name the true parties to the loan, and the focus was on
the intent of the parties to that document. The Government asks us
to apply the Saks analysis regarding the Appellants' fraudulent
intent to this case, which misses the necessary focus of our
inquiry: Was the real estate scheme itself unlawful? We must
answer that the evidence in this record would not allow a rational
juror to find beyond a reasonable doubt that Appellants violated §
1344 or § 657 by giving away lots without compensation to
Cornerstone.
c. False entries
To secure a conviction under 18 U.S.C. § 1006, the government
must prove that (1) the defendant made a false entry in any book,
report, or statement; (2) with intent to injure or defraud that
bank or to deceive an officer of the bank or the regulators. See
United States v. Cordell, 912 F.2d 769, 773 (5th Cir. 1990). The
manifest purpose of this provision is to ensure that an inspection
of a bank's books will yield an accurate picture of the bank's
condition. Thus, an omission of material information qualifies as
a false entry. Id. at 773. To be material, the omission must
have the capacity to impair or pervert the functioning of a
12

government agency. United States v. Beuttenmuller, 29 F.3d 973,
982 (5th Cir. 1994).
Counts Thirteen through Fifteen of the indictment allege that
Gilbert, Baker and Torregrossa made false entries in Cornerstone's
books "by failing to disclose the total number of lots that
Cornerstone Savings purchased and paid for from [various sellers]."
The Government contends that the evidence shows that the Appellants
deliberately omitted the total number of lots purchased in order to
deceive the examiners with respect to Cornerstone's actual
financial health. The Government also argues that Cornerstone's
records did not reflect the direct deeding of the lots to the
builders, which in turn impacted the examiners review of the
appropriate accounting entries as to those transactions.
Armitige testified that she found two sets of documents in
some of Cornerstone's files, one set reflecting the larger number
of lots, and another set for the same transaction showing the
smaller number of lots. She raised questions with Lightfoot about
which was the accurate information. After that discussion, the
documents reflecting the larger number of lots were removed from
the files, because they in fact did not accurately reflect
Cornerstone's real estate holdings. Cornerstone did not receive
any interest in Fallbrook lots, other than the cash down payment
which was recorded in its books. Cornerstone's files originally
showed both numbers, and after Armitige's inquiry showed the
smaller, accurate number. In order to prove its theory of false
entry violation, the government would have had to prove that
13

Cornerstone held some undisclosed interest in the disputed lots.
Armitige testified that she understood at the close of her
examination exactly what had occurred. If Cornerstone had recorded
only the larger number of lots, and omitted the smaller number that
were actually transferred to the institution as the government
advocates, they risked a false entry charge. The most complete
record was one that reflected both the originally negotiated deal
and the subsequently consummated deal -- the very method being
utilized by Cornerstone when Armitige arrived that the government
demonized as "two sets of books." The second set of documents,
removed from the file after Armitige's inquiry, was less accurate
than the ones that remained, so that if Cornerstone was required to
choose, as the Government contends, its choice did not amount to
criminal false entry.
The evidence revealed that Gilbert at one point directed
Cornerstone personnel to conceal any reference to Fallbrook's
involvement with the Monogram sales transaction. However, this
directive was allegedly motivated by his fear that Fallbrook's
involvement was questionable due to Cornerstone directors owning
Fallbrook stock. It will not support a conviction for failing to
disclose the total number of lots purchased and paid for by
Cornerstone, particularly in light of the testimony by the
Government's witness establishing that documents reflecting both
the total number, and the smaller number of lots were found in the
files.

d. Illegal participation in profits
14

Count Sixteen charged that Appellants, with intent to defraud
Cornerstone, the United States and the FHLBB, knowingly
participated, shared and received money, profit and benefits of
Cornerstone in that "each received a portion of the commissions
paid on the purchase and sale of 1224.5 lots by Cornerstone," in
violation of 18 U.S.C. § 1006. There was no dispute at trial that
Baker and Torregrossa received commissions from the lot
transactions. The record is sufficient to support the conclusion
that Gilbert received compensation from Amstar for his role in the
lot transaction, although Gilbert testified that that compensation
was not a commission but a fee for officer services.
The central question on this Count is whether the commissions
Cornerstone paid on the lot sales were illegal. They were fully
disclosed within the customary range paid for real estate sales
commissions and were paid pursuant to the contracts at the time of
closing. The government takes the position that Cornerstone could
have hired defendants or some other real estate professionals, paid
them a salary and required that they do the real estate work
necessary for the transactions without a commission. If such
individuals were available for a salary of $50,000 each, as the
Government contends, Cornerstone could have saved over $1 million
in commissions. However, it is not illegal for real estate
professionals to work on a commission basis rather than for a
salary, nor is it illegal for a savings and loan to use
commissioned agents instead of salaried employees. Most
importantly, it is far from certain, based on this record, that a
15

person who was willing to work for a $50,000 salary in Houston in
the 1980's would have the knowledge and skill necessary to find
1224.5 developed residential lots in Northwest Houston, negotiate
the fire sale prices Cornerstone received in the deals, and put
together the sales and marketing package executed by Appellants.
We therefore conclude that the Government's speculation that
Cornerstone could have purchased the lots without paying real
estate commissions does not amount to sufficient evidence that the
Appellants participated in Cornerstone's profits.
A more difficult question is presented by the money paid by
Amstar to Gilbert. The evidence supports a finding that Gilbert
received compensation from Amstar for his role in selecting and
negotiating the deals on the Cornerstone lots, which the government
relies on to establish Gilbert's illegal participation in
Cornerstone's profits. Gilbert points out that Amstar charged
Cornerstone a reasonable, customary and legal 3 - 6% commission;
the record reveals no evidence that the commissions were outside
the normal rate for real estate transfers, were in fact not paid on
the closing of such transfers, or were in any other way irregular.
We conclude that the record supports a finding that Gilbert's
income from Amstar was illegal participation in Cornerstone's
profits. The jury may well have found that Gilbert performed no
service for Amstar other than his work performed on behalf of
Cornerstone, but received the payments as a kickback rather than
fees for services rendered as an officer. Likewise, a rational
juror could have concluded that Baker aided and abetted Gilbert in
16

this scheme, as the money flowed through a company wholly owned by
Baker, and could not have been paid to Gilbert without Baker's
complicity. On the other hand, there is no support in the record
for any theory of Torregrossa's guilt on Count Sixteen. His
commissions were legally earned, and the Government did not
implicate him in Amstar's payments to Gilbert.

e. Conspiracy
Count One of the indictment charged Appellants with conspiracy
to commit the various crimes charged in the remainder of the
indictment. In order to convict Appellants of conspiracy, the
Government must prove that (1) two or more people agreed to pursue
an unlawful objective; (2) the individual defendant voluntarily
agreed to join the conspiracy; and (3) one or more of the members
of the conspiracy performed an overt act to further the objectives
of the conspiracy. United States v. Beuttenmuller, 29 F.3d 973,
978-79 (5th Cir. 1994). The record is sufficient to sustain the
conspiracy convictions of Gilbert and Baker, based on their
agreement and overt acts relating to the illegal participation in
profits alleged in Count Sixteen.
However, the record does not support Torregrossa's conspiracy
conviction. Where the government fails to prove that the object of
the conspiracy was unlawful, the conviction for conspiracy must be
reversed. Id. at 981. Under Beuttenmuller, we must examine the
underlying transaction and determine whether there was sufficient
evidence to allow a jury to conclude beyond a reasonable doubt that
the alleged object of the conspiracy was illegal. That case, like
17

the one before us, concerned a risky and complex real estate
transaction involving the transfer of residential real estate lots
in the depressed 1980's Texas economy, undertaken by a federally
insured savings and loan association that ultimately failed. This
Court, after examining the component parts of the real estate
transfer, determined that the defendants had benefited themselves
financially, taken risks and lost money, but had not violated any
law in the process, and therefore reversed their conspiracy
convictions for insufficiency of evidence. We find that
Beuttenmuller's analysis controls the question posed by this case.
The examiner's characterization that Cornerstone gave its
assets to builders without compensation indicates her lack of
understanding of the structure of the transaction. The buy-two-
get-one-free packaging of the lot transactions was economically
advantageous to the sellers, to Cornerstone and to the
buyer/builders. Such packaging is not against the law, nor is it
fraudulent. Its innovative, nontraditional application to
residential real estate lots is likewise not illegal or fraudulent.
The evidence established that Cornerstone's residential real estate
program was building and selling homes in Houston in an economic
climate that had suffocated many less aggressive approaches.
Government regulators have an important role in enforcing
statutes and regulations that protect investors and insurers.
However, they exceeded that role in this case by forcing personal
fears about the wisdom of new ventures and risk taking on business
people who acted within the confines of the laws and regulations.
18

Gilbert, who the Government alleged benefitted more than the other
players, in fact risked the most and lost the most. In hindsight,
it is impossible to say whether that loss was inevitable or was
simply the by-product of overzealous regulators. Because the
Government failed to prove that Torregrossa agreed to any unlawful
objective, his conspiracy conviction must be reversed.
f. Conclusion
Based on the foregoing, we conclude that there was sufficient
evidence to support Gilbert's and Baker's convictions under Counts
One and Sixteen. There is insufficient evidence to support the
other convictions, which we therefore reverse.
IV. Statute of Limitations
Appellants argue that the retroactive effect of 18 U.S.C. §
3293, which Congress enacted in 1989 to provide a new ten year
statute of limitations on certain financial institution offenses,
violates the Ex Post Facto Clause of the United States
Constitution. This issue was settled against Appellants in United
States v. Brechtel, 997 F.2d 1108 (5th Cir.), cert. denied,
___U.S.___, 114 S.Ct. 605 (1993).
V. Reversal and Remand
All of Torregrossa's convictions are REVERSED. All of
Gilbert's and Baker's convictions are REVERSED, with the exception
of the convictions under Counts One and Sixteen, which are
AFFIRMED. We find no merit in the other grounds of error raised by
Gilbert and Baker as they specifically relate to the affirmance of
the convictions on Counts One and Sixteen. The sentences are
19

VACATED and the case is REMANDED so that the district court can
resentence Gilbert and Baker.
20