1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-21-1998

United States v. Haddy

Precedential or Non-Precedential:

Docket 96-5589

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Recommended Citation

"United States v. Haddy" (1998). 1998 Decisions. Paper 18.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/18
Filed January 21, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 96-5589 and 96-5622 

UNITED STATES OF AMERICA 

v. 

BRAD HADDY, a/k/a Bradley J. Haddy 

Brad Haddy, 

 Appellant in No. 96-5589 

(D.C. Crim. No. 93-cr-00558-3) 

UNITED STATES OF AMERICA 

v. 

ERIC WYNN, 

 Appellant in No. 96-5622 

(D.C. Crim. No. 93-cr-00558-1) 

Appeal from the United States District Court 

for the District of New Jersey 

Argued October 20, 1997 

Before: MANSMANN and GREENBERG, Circuit Judges, 

and ALARCON, Circuit Judge.* 

(Opinion filed January 21, 1998) 

_________________________________________________________________ 

*Honorable Arthur L. Alarcon of the United States Court of Appeals for 

the Ninth Circuit, sitting by designation. 
 David M. Rosenfield (ARGUED) 

 Special Assistant U.S. Attorney 

 Kevin McNulty 

 Assistant U.S. Attorney 

 Amy S. Winkelman (ARGUED) 

 Assistant U.S. Attorney 

 Faith S. Hochberg 

 U.S. Attorney 

 Office of United States Attorney 

 970 Broad Street 

 Room 502 

 Newark, NJ 07102 

 COUNSEL FOR APPELLEE 

 Robert A. Brunig, Esquire (ARGUED) 

 Moss & Barnett 

 90 South 7th Street 

 4700 Norwest Center 

 Minneapolis, MN 55402 

 COUNSEL FOR APPELLANT IN 

 NO. 96-5589 

 Alan Dexter Bowman, Esquire 

 (ARGUED) 

 Alan Dexter Bowman, PA. 

 Raymond A. Brown, Esquire 

 Brown & Brown, P.C. 

 Gateway I 

 Suite 105 

 Newark, NJ 07102 

 COUNSEL FOR APPELLANT IN 

 NO. 96-5622 

 2 
OPINION OF THE COURT 

MANSMANN, Circuit Judge. 

Eric Wynn and Brad Haddy appeal from judgments in 

criminal cases entered by the District of New Jersey after a 

jury found them guilty of conspiracy to commit securities 

fraud and of substantive crimes relating to manipulation of 

the stock market. Wynn was also convicted of wire fraud. 

After sentencing, Wynn and Haddy appealed, raising a 

number of assertions of error. Two questions -- whether 

the indictment contained duplicitous counts and whether 

investor reliance is a requisite of proof to convict under 

section 10(b) of the Securities Act of 1934 -- require 

discussion. Several other issues, involving constructive 

amendment of the indictment, statute of limitations, 

severance, willfulness as an element of the securities law 

violation, character evidence of a witness, prosecutorial 

misconduct, admission of evidence, jury instructions, 

competency and sentencing, are without merit and do not 

warrant further discussion.1 

_________________________________________________________________ 

1. In his brief, Haddy set forth these additional issues as: 

 1. The government failed to prove that he acted willfully, an 

 essential element of the crimes of securities fraud and conspiracy 

to 

 commit securities fraud; 

 2. His right to a fair trial was prejudiced by the district court's 

 denial of his motion for a separate trial; 

 3. Prosecutorial misconduct, consisting of the unauthorized use of 

 a grand jury subpoena, offering testimony known to be untrue, lack 

 of a "good faith basis" for asking certain questions of a witness, 

 making baseless arguments that certain assumptions were 

 "incorrect and incomplete" or "misleading," offering a misleading 

 summary chart, and interfering with his attempts to interview 

 witnesses, prejudiced him and required a mistrial; 

 4. The district court erred in excluding testimony by opinion 

 witnesses who would impeach the credibility of a principal witness 

 for the prosecution and thus denied him his Sixth Amendment right 

 to compulsory process; 

 3 
We will affirm the judgments entered. We concludefirst, 

that the indictment does not suffer from the vice of 

duplicity. The relevant statutory and regulatory language 

allow charging an overall scheme to defraud in a single 

count of an indictment. Second, criminal liability under 

section 10(b) of the Securities Exchange Act does not 

require deception of and reliance by an identifiable buyer or 

_________________________________________________________________ 

 5. The district court erred by admitting financial records obtained 

 pursuant to grand jury subpoena in direct contravention of the 

 Right to Financial Privacy Act; 

 6. The district court erred by admitting into evidence recordings 

of 

 intercepted wire communications and evidence derived from these 

 communications; 

 7. The government failed to apply for or obtain authorization or 

 approval to use or disclose the contents of the intercepted wire 

 communications before the grand jury; 

 8. The district court erred in refusing to instruct the jury 

concerning 

 the time at which a sale of a security is deemed complete, venue, 

 legal responsibility, and the need for showing deception and 

investor 

 reliance; and erred in charging the jury that it might return a 

 verdict of guilty as to Count I (or Counts II, III and IV) without 

 finding unanimously that one of the overt acts charged in the 

 indictment occurred during the limitation period; and, 

 9. The district court erred in sentencing him by not reducing his 

 sentence to take into consideration that conspiracy is a "lesser 

 included offense" of the continuing criminal enterprise and by 

 incorrectly using the "gross gain secured by the conspiracy as a 

 whole, [by] the co-conspirators and those persons and accounts 

 which they controlled" to compute the amount of loss. 

In Wynn's brief, these issues are described as: 

 1. The district court erred in permitting the government to 

 constructively amend the indictment by altering the theory of the 

 government presented to the grand jury that Wynn's conduct was 

 per se unlawful, to an urging before the petit jury that he engaged 

 in lawful activity with a corrupt and manipulative intent; and, 

 2. The district court erred in determining that the government met 

 its burden of proving Wynn's mental competency by concluding that 

 the panic disorder suffered by him did not render him unable to 

 assist in his defense. 
 4 
seller of securities. The statute's objective of maintaining 

the integrity of the stock market forbids deceitful practices 

without mention of whether investors relied upon the 

manipulative devices in connection with a securities 

transaction. 

Our jurisdiction is granted by 28 U.S.C. S 1291. 

I. 

We review the facts in a light favorable to the 

government, the verdict winner. 

A. The Scheme 

In approximately 1987, Eric Wynn and Barry Davis 

formed a company called Princeton Financial Consultants 

to raise capital for companies and to promote stocks. 

Through this entity, Wynn and Davis masterminded and 

directed a number of securities trading scams by designing 

a plan to artificially raise the prices of particular securities, 

known as penny stocks. Penny stocks, generally valued at 

under $5.00 a share, are traded on the over-the-counter 

market through the National Association of Securities 

Dealers Automated Quotation system (NASDAQ). 

Princeton employees called on brokers and traders 

throughout the country touting different stocks. The 

participation of collaborating stockbrokers was essential to 

the effectiveness of the scheme. One of the brokers who 

followed the Princeton/Wynn recommendations was Brad 

Haddy, who sold securities through the Minneapolis 

brokerage firm of L'Argent Securities. 

The manipulation involved four basic steps: (1) control 

the quantity of stock available for trading; (2) generate 

demand for the stock; (3) raise the price of the stock; and 

(4) sell out at a large profit. 

Control of the supply of securities was gained by "boxing" 

the initial public offerings ("IPOs") of securities in particular 

companies. Boxing refers to an allocation of almost all of 

the available stock to accounts controlled by "players" -- 

those who had agreed to trade the stock per the direction 

 5 
of Wynn. One directive required that when the after-trading 

market commenced -- the public trading that occurs after 

the close of the IPO -- the players could not sell the stock 

until Wynn gave the go-ahead. With this restriction, Wynn 

was able to control the supply of stock which, in turn, 

enabled him to regulate the price of the stock. 

Step two, generation of demand, was primarily 

accomplished through bribery of brokers. Colluding brokers 

sold securities to their customers at prices and from 

brokerage firms designated by Wynn. The brokers were 

then instructed to hold the particular stock off the market 

for a period of time (usually six months). In exchange, the 

brokers received various inducements, including cash, 

stock below the market price, guaranteed profits and 

promises of participation in future deals. Another way 

Wynn created demand for a particular stock was by secretly 

advising brokers of impending mergers of certain 

companies before public announcement of the event. 

The next step, the price increase, was realized through 

pre-arranged and restricted trading in which selected 

brokers bought stock at steadily increasing prices -- again, 

as directed by Wynn. 

Once the price of the manipulated securities rose to 

certain levels, the inflated value was maintained through 

deals with "market maker" brokerage firms. These firms 

represent themselves to the investing public as being 

willing to sell and trade risky securities. Wynn induced 

certain market makers to set their buy (bid) and sell (ask) 

for some securities at prices in accordance with his 

instructions in exchange for guaranteed trading profits. By 

manufacturing a demand for these securities, the 

participants insured their personal profits occasioned by 

transactions in these securities. 

The manipulations detailed in the indictment concern the 

use of the services of Sheffield Securities, a brokerage firm 

in Fort Lauderdale, Florida. Sheffield was run by Ronald 

Martini, who, despite being barred from participation in the 

securities business, was a secret owner of Sheffield. Wynn 

entered into an agreement with the principals of Sheffield 

which allowed him to dominate the initial public offerings of 

 6 
stocks in certain shell companies underwritten by Sheffield. 

Wynn would also be permitted to direct the after market 

trading in these particular securities. 

Three security offerings in particular epitomize the scope 

of the illegal activity and are the subjects of counts 2, 3 and 

4 of the indictment. 

B. Count 2 - Vista Capital Corp. 

The first stock that Wynn and Davis manipulated 

through Sheffield was Vista Capital Corporation, a company 

engaged in an IPO. In filings with the Securities and 

Exchange Commission, Vista was represented as a blind 

pool, a company with no actual or anticipated business 

operations. Vista's status was, however, misrepresented. 

During the period of the IPO, Wynn arranged for a merger 

between Vista and a film company called Bima 

Entertainment. 

Wynn's plan was to raise money for Vista through an

offering of its stock, as a result of which Vista would 

become a public company. Wynn would then trade Vista 

securities on the OTC market in a manner that would

insure that the price of Vista would rise, enabling the 

players to make a substantial amount of money. As 

planned, the price of Vista rose $.11 per share within the 

first month of aftermarket trading. 

In line with the four-step design, Wynn controlled the 

supply of Vista stock by boxing the Vista IPO -- allocating 

the securities issued to accounts set up at Sheffield. 

Although the Vista prospectus stated that Sheffield, the 

underwriter, would make the final decisions concerning 

stock distribution during the IPO, it was actually Wynn who 

directed the specifics of the offering. When investors outside 

Wynn's affiliations requested Vista stock, they were denied 

the opportunity to participate in the trading. Wynn was 

able to regulate the trading in the Vista IPO stock partly 

because Sheffield maintained control over the actual Vista 

stock certificates. If a "non-playing" customer tried to have 

Vista stock transferred and sold, Sheffield's clearing agent 

would so advise Sheffield, who passed on the information to 

Wynn. The only stock certificate transfers that Sheffield 

 7 
authorized the clearing agent to effectuate were those 

allocated to accounts associated with Wynn. 

Wynn generated the demand for the Vista stock by 

offering inducements or bribes to brokers to have their 

customers buy the stock. One broker, John Marsala, 

testified that Wynn asked him to have his customers buy 

Vista stock and hold it off the market. In return, Marsala 

was offered 100,000 Vista warrants2 for himself. Although 

he opted out of participation, he observed another broker 

putting a stock certificate into his briefcase. Wynn advised 

Marsala that what he witnessed was a broker receiving the 

same warrants that had been promised to Marsala if he had 

participated in the Vista deal. 

Bribes were not the only means by which Wynn induced 

brokers to buy Vista stock. He also encouraged 

participation by offering non-public inside information. In 

the case of Vista, brokers, including Haddy, were told that 

the company would be merging prior to the close of the IPO. 

Wynn was able to represent the Vista/Bima merger as a 

certainty because he had arranged the merger through his 

consulting company, Skyline Capital Corp. 

Although the Vista/Bima merger was arranged before the 

close of the Vista IPO, the Vista prospectus was not timely 

amended to disclose the information. An expert for the SEC 

testified that if a blind pool company finds a probable 

merger candidate before the close of its IPO, the company 

must stop distributing its securities and file a post-effective 

amendment with the SEC. Notice to the agency is required 

because a potential merger would amount to a fundamental 

change affecting decisions of investors. 

Wynn, Davis and Haddy and other players eventually 

sold their Vista stock at a large profit. 

C. Count III - Castleton Investors Corp. 

The second stock manipulated through Wynn's control of 

Sheffield was Castleton Investors Corp., another shell 

_________________________________________________________________ 

2. A warrant is a right to acquire stock at a defined future time and at 

a specified price. 

 8 
company. Castleton became a public company through an 

IPO underwritten by Sheffield in 1986. In late June, 1988, 

Wynn was advised that a security guard anti-terrorism 

business owned by G. Gordon Liddy3 wanted to merge with 

Castleton. Sheffield expressed its willingness to sell Liddy a 

majority of the free-trading Castleton stock currently owned 

by Sheffield customers. 

Wynn took over the helm of the Liddy deal. His 

consulting company, Skyline, entered into an agreement 

with Liddy for a 30-day exclusive right to find a merger 

candidate for the Liddy company. 

Once Wynn lined up the expected merger of Castleton

and Liddy, he and his coconspirators began manipulating 

the price of stock using the familiar four step process. 

About 80% of the free-trading stock was acquired by the 

"players" from Sheffield customers who were not told of the 

merger. 

Haddy was among the brokers promised Castleton stock 

in exchange for agreeing to have his customers buy a large 

block of the stock. Two days after a tape-recorded 

conversation in which Wynn assured Haddy that he would 

receive stock, Haddy and his L'Argent customers bought 

500,000 shares of Castleton common stock. 

Demand for Castleton stock was then created by 

publicizing the intended merger between the company and 

Liddy. The announcement resulted in additional buying. 

Sheffield, acting in accordance with Wynn's instructions as 

to bid and ask prices, then traded the stock in conformity 

with the previously arranged deals. Profits were thus 

guaranteed. 

D. Count IV - Bellatrix Corp. 

Count IV charged a manipulation scheme involving 

securities from the Bellatrix Corporation, also a blind pool 

company engaged in an IPO underwritten by Sheffield. The 

pattern in the Bellatrix trading mirrored that of the Vista 

_________________________________________________________________ 

3. There is no suggestion that Liddy was in any way involved in 

wrongdoing. 

 9 
stock manipulation -- "box" the IPO, manufacture demand, 

raise the price through controlled trading, and sell out at a 

profit. Similarly, the fact of Bellatrix' impending merger 

with Gamenet, a computer company, was not disclosed to 

the SEC. 

The Bellatrix manipulation was interrupted on the second 

day of after market trading when the FBI executed search 

warrants at Wynn's home and, on the next day, at the 

offices of Sheffield Securities. 

E. The Prosecution 

On November 15, 1993, a federal grand jury in the 

District of New Jersey returned an indictment charging Eric 

Wynn, Brad Haddy, Anthony Nandino, Irwin Frankel and 

Perry Constantinou with conspiracy to commit securities 

fraud contrary to 15 U.S.C. S S 77q(a) and 77x (Securities 

Act of 1933) and 15 U.S.C. S S 78j(b) (section 10(b)) and 78ff 

(Securities Exchange Act of 1934) and 17 C.F.R. S 240.10b5 (Rule 10b-5) in violation of 18 U.S.C. S 371 (Count I); and, 

with execution of schemes to defraud in connection with 

transactions in three different securities (Counts II through 

IV). Wynn was charged in nine additional wire fraud

counts. 

After a six-month trial, the jury returned guilty verdicts 

against Wynn and Haddy on all charges.4 Post-trial motions 

were denied.5 Haddy was sentenced to 27 months' 

_________________________________________________________________ 

4. The jury found Nandino not guilty on Count IV but could not reach a 

verdict on the remaining counts. Constantinou was acquitted of all 

charges against him. Frankel pled guilty prior to trial. 

Other coconspirators, Barry Davis, Ronald Martini, John LaSala, Allen 

Weinstein, Ronald Spencer, Douglas Selander, Frank Grillo, and John 

Marsala, entered cooperating plea agreements, prior to trial, to 

informations stemming from the same investigation. 

5. Prior to sentencing, Wynn requested a competency hearing nunc pro 

tunc, alleging that he had suffered from a mental disability which had 

prevented him from fully participating in his trial. At the government's 

request, the district court appointed a psychiatrist to examine Wynn. 

The district court then conducted a competency hearing with testimony 

from the court-appointed psychiatrist and from the psychiatrist who had 

 10 
imprisonment and ordered to pay a special assessment of 

$200. Wynn was sentenced to 52 months' imprisonment, 

followed by three years of supervised release. A $50,000 

fine was also imposed on Wynn. 

II. 

We first address whether Counts II, III and IV of the 

indictment, charging manipulation of the stocks of each of 

the three public shell companies, were duplicitous. This is 

a legal question requiring plenary review. United States v. 

Bryan, 868 F.2d 1032, 1037 (9th Cir. 1989). 

The indictment charged Wynn and Haddy with engaging

in a fraudulent scheme to design to manipulate the price of 

Vista (Count II), Castleton (Count III) and Bellatrix (Count 

IV) securities.6 Wynn and Haddy contend that each 

individual transaction relating to the individual securities 

should have been charged in a separate count. Charging an 

_________________________________________________________________ 

treated Wynn during trial. After the hearing and argument, the district 

court denied Wynn's motion to be declared incompetent nunc pro tunc. 

The court also denied accompanying motions for a new trial based on 

Wynn's alleged incompetence and additional post-trial motions brought 

by both defendants. 

6. The relevant portion of Count II reads: 

 From at least as early as in or about January 1988, to at least as 

 late as in or about December, 1988, in the District of New Jersey 

 and elsewhere, the defendants Eric Wynn . . . Brad Haddy . . . and 

 others . . . knowingly and willfully employed a scheme to defraud 

in 

 connection with the purchase and sale of Vista Securities, through 

 the use of means and instrumentalities of interstate commerce and 

 of the mails, in that they took actions designed to manipulate the 

 price of Vista Securities, all as set forth in Count I of this 

 indictment. 

 In violation of Title 15, United States Code, Sections 78j(b) and 

 78ff, Title 18, United States Code, Section 2, and Title 17, Code 

of 

 Federal Regulations, Section 240.10b-5. 

Counts III and IV were identical except in the identification of the 

particular security and dates involved. The stock manipulation related to 

Castleton (Count III) and Bellatrix (Count IV) occurred between June and 

December of 1988. 

 11 
overall scheme, they argue, renders the indictment faulty 

because of its duplicity. 

Duplicity is the improper joining of distinct and separate 

offenses in a single count. United States v. Starks, 515 F.2d 

112, 116 (3d Cir. 1975). Duplicitous counts may conceal 

the specific charges, prevent the jury from deciding guilt or 

innocence with respect to a particular offense, exploit the 

risk of prejudicial, evidentiary rulings, id. at 116-17, or 

endanger fair sentencing. United States v. Shorter, 809 F.2d 

54, 58 n.1 (D.C. Cir. 1987). 

We must ascertain the allowable unit of prosection to 

decide if the counts of the indictment properly charge a 

violation of the pertinent statute. United States v. Amick, 

439 F.2d 351, 359 (7th Cir. 1971), see also United States v. 

Pollen, 978 F.2d 78, 85 (3d Cir. 1992) (multiplicity7 case 

holding that indictment must follow statute creating 

offense). Congressional intent dictates the proper unit of 

prosecution. United States v. Cooper, 966 F.2d 936, 942 

(5th Cir. 1992). 

The starting point in determining the intent of Congress 

is, of course, the language of the statute. 15 U.S.C. S 78j(b), 

commonly known as section 10(b), by its title, proscribes 

employment of manipulative deceptive devices in 

connection with securities transactions. The section reads: 

 S 78j. Manipulative and deceptive devices. 

 It shall be unlawful for any person, directly or 

 indirectly, by the use of any means or instrumentality 

 of interstate commerce or of the mails, or of any facility 

 of any national securities exchange -- 

 *** 

 (b) to use or employ, in any connection with the 

 purchase or sale of any security registered on the 

 national securities exchange or any security not so 

_________________________________________________________________ 

7. Indictments charging a single offense in different counts are 

multiplicitous. Multiplicity may result in multiple sentences for a single 

offense in violation of double jeopardy, or otherwise prejudice the 

defendant. United States v. Cooper, 966 F.2d 936, 942 n.9 (5th Cir. 

1992). 

 12 
 registered, any manipulative or deceptive device or 

 contrivance in contravention of such rules and 

 regulations as the Commission may prescribe as 

 necessary or appropriate in the public interest or for 

 the protection of investors. 

15 U.S.C. S 78j(b). 

Under the authority of this section, the SEC promulgated 

Rule 10b-5 to execute enforcement of section 10(b). The 

regulation makes it unlawful for any person, in connection 

with the purchase or sale of security, to (1) employ a device, 

scheme or artifice to defraud; (2) make any false statement 

of material fact; or, (3) engage in any act, practice or course 

of business that operates as fraud or deceit upon any 

person. The clear wording of the statute and the rule thus 

emphasize the use of manipulative devices in describing the 

offense. The phrase "in connection with the purchase or 

sale of securities" positions the illegal activity within the 

framework of the Securities Exchange Act; it does not 

describe the prohibited conduct. 

The Supreme Court has interpreted section 10(b) and

Rule 10b-5 expansively in accordance with its view of 

Congress' intent in enacting the 1934 Act as a vehicle to 

minimize fraud in securities trading. As the Court stated in 

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 

128, 151 (1972), "These proscriptions, by statute and rule, 

are broad and, . . . obviously meant to be inclusive." The 

legislation is construed " `flexibly to effectuate its remedial 

purpose,' " id. (quoting SEC v. Capital Gains Research 

Bureau, Inc., 375 U.S. 180, 195 (1963)), not"technically 

and restrictively." Id. 

The particular counts of the indictment before us track 

the statutory and regulatory language. They describe the 

manipulative implementation of a securities trading

scheme, the precise activity described in the statute and 

the implementing rule as illegal. Here, the device was a 

four-part scheme in which the buying and selling of

securities was a segment. Without the boxing, the 

generation of demand, the contrived rise of the price and 

the sale at the profit, however, any particular transaction 

might not be unlawful. Rather, the purchase or sale was 

intended to further the manipulation of the stock price. 

 13 
We thus conclude that the individual purchase or sale 

was not the appropriate unit of prosecution here; these 

retail events were only a step in the advancement of the 

scheme as a whole. On the facts here, each count properly 

charged a manipulation of the securities of each of the 

three separate companies -- each involving a discrete 

scheme. 

In resolving this issue, we decline to dictate an inflexible 

rule regarding the allowable unit of prosecution in a 

securities fraud case. The Federal Rules of Criminal 

Procedure require that an indictment be a "plain, concise, 

and definite written statement of the essential facts 

constituting the offense charged." Fed. R. Crim. P. 7(c)(1). 

Here, the offenses charged were schemes designed to

manipulate the prices of securities. It may be that other 

violations of the securities laws would lend themselves to a 

differently enumerated indictment. For example, in a 

multiplicity case, United States v. Langford, 946 F.2d 798 

(11th Cir. 1991), the issue was whether the use of multiple 

mailings in furtherance of a conspiracy to commit securities 

fraud in violation of section 10(b) and Rule 10b-5 could 

form the basis of separate counts of an indictment. The 

Court of Appeals for the Eleventh Circuit decided that it 

could not. In so concluding, the Eleventh Circuit recognized 

that the allowable unit of prosecution under section 10(b) is 

the use of a manipulative device or contrivance. Id. at 803. 

The court decided, however, that the overall scheme need 

not be charged in a single count. Instead, any false 

statement in connection with a discrete sale can be

considered an appropriate unit of prosecution. Id. Langford 

does not mandate, however, that each sale must form the 

basis of a count of the indictment. Rather, it clarified that 

in addition to the allowable prosecution of a scheme to 

defraud, it can be something less. 

Finally, on this issue, we observe that even if the

indictments were duplicitous, the error would be harmless. 

None of the concerns of duplicity have been implicated. 

There is no allegation here that the integrity of the 

prosecution was compromised by the particular structure of 

the indictment. Therefore, we conclude that counts II, III 

and IV of the indictment, each involving a course of activity 

 14 
yet a single scheme, properly charged Haddy and Wynn 

with violations of the securities laws. 

III. 

Reliance Requirement 

Haddy and Wynn also argue that their convictions should 

be reversed because the government did not prove that 

investors actually relied upon fraudulent and manipulative 

practices in purchasing or selling the subject securities. 

The specific question is whether reliance is an element of 

the crime of stock manipulation, proof of which is essential 

to conviction. We hold that no such statutory requirement 

exists. 

The federal securities law were enacted largely in 

response to the stock market crash of 1929. Congress 

recognized the need for investors to be protected against 

fraud, and that if regulatory control in the securities 

industry had been in place, the turbulence created by the 

crash may have, at least, been abated. S. Rep. No. 1445, 

73d Cong., 2d Sess. 81 (1934). Thus, in the interest of 

preventing practices that destabilized the securities market, 

the Securities Act of 1933 and the Securities Exchange Act 

of 1934 established systems requiring full disclosure of 

material information by companies transacting in 

securities. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206 

(1976). The Securities and Exchange Commission then

promulgated Rule 10b-5 in 1942 to achieve the remedial 

purposes of the 1934 Act. As we mentioned above, the 

Supreme Court has opined that these laws should be 

flexibly applied. Affiliated Ute, 406 U.S. at 151. 

We again look first to the statutory language to define the 

contours of the offense. Neither the statute nor the rule 

includes a reliance requirement. Instead, both section 10(b) 

and Rule 10b-5 prohibit the employment of manipulative 

and deceptive devices in connection with the purchase or 

sale of securities. 

Section 10(b)'s omission of reference to a particular 

victim is compelling evidence that investor reliance is not 

 15 
required for a securities fraud conviction. The language 

does not proscribe deception on a purchaser or seller of a 

security; instead it speaks to deceptive devices employed "in 

connection with the purchase or sale of any security." 

United States v. O'Hagan, 117 S. Ct. 2199, 2210 (1997). 

Rule 10b-5 also prohibits deceptive devices "as necessary 

or appropriate in the public interest or for the protection of 

investors." Under this regulation, the SEC is authorized to 

prohibit deceptive acts that it concludes would have 

deleterious effect on the integrity of the securities market 

and on investor confidence. See 15 U.S.C. S 78b (purpose of 

Exchange Act is "to insure the maintenance of fair and 

honest markets"). This clear language obviates the 

necessity of identification of a specific victim who acted 

upon the deception. 

In United States v. Naftalin, 441 U.S. 768 (1979), the 

Supreme Court rejected the contention that section 17a of 

the Securities Act of 1933, which prohibits any device, 

scheme or artifice to defraud in the offer or sale of any 

securities, requires that the deception be perpetrated on the 

individual purchasing the stock. In Naftalin, an investor 

was prosecuted for falsely representing to a broker that he 

owned certain stock. The brokers who were deceived 

suffered losses, but not those investors who actually 

purchased the shares. Naftalin argued that the 1933 Act's 

prohibition against fraud "in" the offer of the sale of 

securities was narrower than section 10(b)'s proscription 

against deception "in connection with" the purchase or sale 

and, accordingly did not encompass deception directed at 

brokers. The Court expressed doubt that the phrases of the 

two Acts had different scopes; but, even assuming a

narrower reach of the 1933 Act, the Court rejected the 

argument that it was limited to fraud on investors. Id. at 

773 n.4. The Court interpreted section 17a as requiring 

only that the fraud occur "in" an offer or sale of securities. 

Id. at 772-73. We read Naftalin, then, as teaching that if 

fraud "in" a securities transaction, as prohibited by the 

1933 Act, does not require fraud on an investor, then 

deception "in connection with" a securities transaction per 

the 1934 Act does not have such a requirement. 

 16 
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

(1975) concerned a private right of action under the 

securities laws, but is nonetheless instructive on the 

question of reliance by identifiable victims in a criminal 

case. In Blue Chips, the Court limited the class of persons 

who may bring an action under section 10(b) and Rule 10b5 to those who would actually purchase or sell securities. 

The Court imposed the purchase or sell requirement for 

standing purposes - recognizing the danger of litigation by 

investors who did not make an actual purchase but who 

might later claim that they would have but for the alleged 

deceptive conduct. Id. at 747. Significantly, in Naftalin, the 

Court made clear that the purchaser-seller standing rule of 

Blue Chips is "inapplicable" to a criminal prosecution. 441 

U.S. at 774 n.6. 

The statutory term "manipulation" also detracts from a 

theory that specific investor reliance is required. In Santa 

Fe Industries, Inc. v. Green, 430 U.S. 462, 476-77 (1977), 

the Supreme Court offered that manipulation is virtually a 

term of art in securities law and refers to conduct

artificially affecting market activity in order to mislead 

investors. The activity described here falls within the 

confines of this description. Wynn and Haddy devised a 

scheme by which the prices of certain securities did not 

reflect market trends, but rather, were induced by their 

contrivances affecting the price of the stock. The allocation 

of the stock, the controlled dissemination of insider 

information, and the offering of bribes had the impact of 

artificially influencing market activity. A particular 

investor's reliance on the representations is the anticipated 

response, but it is not an element of the offense. 

The issue of investor reliance was recently decided by the 

Supreme Court in O'Hagan in the context of a 

misappropriation case. Under the misappropriation theory, 

securities fraud is committed when a person, in connection 

with a securities transaction, misappropriates confidential 

information in breach of a duty to the source of the 

information. 117 S.Ct. at 2207. 

The O'Hagan defendant was a partner of a lawfirm 

which had been retained as local counsel by a company 

that was planning to acquire a second company. During the 

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preparation stages of the acquisition, O'Hagan purchased 

call options for the target company stock, as well as shares 

in the target company. Following the public announcement 

of the tender offer, the lawyer exercised his call options, 

liquidated his position and realized a profit in excess of four 

million dollars. The Supreme Court upheld O'Hagan's

conviction under section 10(b) and Rule 10b-5 on a 

misappropriation theory of securities fraud. The Court 

noted that the theory comports with 10(b)'s language, 

which requires deception "in connection with the purchase 

or sale of any security," not deception of an individual 

purchaser or seller. Id. At 2210. Thus, although O'Hagan 

differs by virtue of the theory the prosecution pursued, it is 

strong affirmation of the language of Nafatlin and Blue 

Chips that convictions under the securities laws do not 

require identification of or reliance by a particular victim. 

What distinguishes misappropriation from manipulation is 

the party to whom disclosure was not afforded. With

manipulation, it is the investors who are deceived. With 

misappropriation, it is the source of the information, in 

most instances, the corporation involved. This distinction 

does not change the fact that the integrity of the free 

market has been compromised. 

We therefore conclude that reliance on the deceptive 

practice by an identifiable victim participating in a 

securities transaction is not required for conviction in the 

type of stock manipulation case before us.8 

_________________________________________________________________ 

8. United States v. Russo, 74 F.3d 1383 (2d Cir. 1996), is not to the 

contrary. In Russo, the defendants were convicted in a stock 

manipulation scheme which involved short sales of high value stocks by 

a market maker to generate false credits in an account with a clearing 

broker. The district court instructed the jury that in order to find the 

defendants guilty of section 10(b) and Rule 10b-5 securities fraud, it 

must find that the clearing broker was deceived. The Court of Appeals 

for the Second Circuit held that the instruction was proper because "it 

fairly apprised the jury of the essence of the defense theory...." Id. at 

1393. The case did not hold, nor was it an issue, that reliance is a 

required element in a securities fraud case. 

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IV. 

Conclusion 

For the reasons above, we will affirm the judgments in 

these criminal cases. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

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