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. e du/thir dc ir c uit_1998/18Filed 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 C ourt 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

2OPINION OF THE COURT

MANSMANN, Circuit Judge.

Eric Wynn and Brad Haddy appeal from judgments in criminal cases entered by the District of New Jerse y after a jury found them guilty of conspiracy to commit secu rities fraud and of substantive crimes relating to manipul ation of the stock market. Wynn was also convicted of wire f raud. After sentencing, Wynn and Haddy appealed, raising a number of assertions of error. Two questions -- whe ther the indictment contained duplicitous counts and whe ther investor reliance is a requisite of proof to convic t under section 10(b) of the Securities Act of 1934 -- requ ire discussion. Several other issues, involving constru ctive amendment of the indictment, statute of limitations
, severance, willfulness as an element of the securit ies law violation, character evidence of a witness, prosecu torial misconduct, admission of evidence, jury instruction s, competency and sentencing, are without merit and do not
warrant further discussion.1

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

1. The government failed to prove that he ac ted willfully, an
essential element of the crimes of securitie s 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 t he unauthorized use of a grand jury subpoena, offering testimony kn own to be untrue, lack of a "good faith basis" for asking certain q uestions of a witness, making baseless arguments that certain assum ptions were "incorrect and incomplete" or "misleading," offering a misleading summary chart, and interfering with his atte mpts to interview witnesses, prejudiced him and required a mis trial;

4. The district court erred in excluding tes timony 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;

3We will affirm the judgments entered. We concludefi rst,

that the indictment does not suffer from the vice o f duplicity. The relevant statutory and regulatory la nguage allow charging an overall scheme to defraud in a si ngle count of an indictment. Second, criminal liability under section 10(b) of the Securities Exchange Act does n ot require deception of and reliance by an identifiabl e buyer or

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5. The district court erred by admitting fin ancial records obtained pursuant to grand jury subpoena in direct co ntravention of the Right to Financial Privacy Act;

6. The district court erred by admitting int o evidence recordings

of intercepted wire communications and evidence derived from these communications;

7. The government failed to apply for or obt ain 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 i nstruct the jury concerning the time at which a sale of a security is de emed complete, venue, legal responsibility, and the need for showi ng deception and
investor reliance; and erred in charging the jury tha t it might return a verdict of guilty as to Count I (or Counts I I, III and IV) without finding unanimously that one of the overt ac ts charged in the indictment occurred during the limitation pe riod; and,

9. The district court erred in sentencing hi m by not reducing his
sentence to take into consideration that con spiracy 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 pe rsons 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 th e government to constructively amend the indictment by alter ing the theory of the government presented to the grand jury that Wynn's conduct was per se unlawful, to an urging before the pet it jury that he engaged in lawful activity with a corrupt and manipu lative intent; and,

2. The district court erred in determining t hat the government met its burden of proving Wynn's mental competen cy by concluding that the panic disorder suffered by him did not r ender him unable to
assist in his defense.4seller of securities. The statute's objective of ma intaining

the integrity of the stock market forbids deceitful practices without mention of whether investors relied upon th e manipulative devices in connection with a securitie s 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 Consult ants to raise capital for companies and to promote stock s. Through this entity, Wynn and Davis masterminded an d directed a number of securities trading scams by de signing a plan to artificially raise the prices of particul ar securities, known as penny stocks. Penny stocks, generally valu ed at under $5.00 a share, are traded on the over-the-cou nter market through the National Association of Securiti es Dealers Automated Quotation system (NASDAQ).

Princeton employees called on brokers and traders throughout the country touting different stocks. Th e participation of collaborating stockbrokers was ess ential to
the effectiveness of the scheme. One of the brokers who followed the Princeton/Wynn recommendations was Bra d Haddy, who sold securities through the Minneapolis brokerage firm of L'Argent Securities.

The manipulation involved four basic steps: (1) con trol the quantity of stock available for trading; (2) ge nerate demand for the stock; (3) raise the price of the st ock; 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 "play ers" -- those who had agreed to trade the stock per the dir ection

5of 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 t urn, 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 fr om brokerage firms designated by Wynn. The brokers wer e then instructed to hold the particular stock off th e market for a period of time (usually six months). In excha nge, the brokers received various inducements, including cas h, stock below the market price, guaranteed profits an d promises of participation in future deals. Another way Wynn created demand for a particular stock was by s ecretly advising brokers of impending mergers of certain companies before public announcement of the event.

The next step, the price increase, was realized thr ough pre-arranged and restricted trading in which select ed brokers bought stock at steadily increasing prices -- again, as directed by Wynn.

Once the price of the manipulated securities rose t o certain levels, the inflated value was maintained t hrough deals with "market maker" brokerage firms. These fi rms represent themselves to the investing public as bei ng willing to sell and trade risky securities. Wynn in duced certain market makers to set their buy (bid) and se ll (ask) for some securities at prices in accordance with hi s instructions in exchange for guaranteed trading pro fits. By manufacturing a demand for these securities, the participants insured their personal profits occasio ned by
transactions in these securities.

The manipulations detailed in the indictment concer n the use of the services of Sheffield Securities, a brok erage firm in Fort Lauderdale, Florida. Sheffield was run by R onald Martini, who, despite being barred from participati on in the securities business, was a secret owner of Sheffiel d. Wynn entered into an agreement with the principals of Sh effield which allowed him to dominate the initial public of ferings of

6stocks in certain shell companies underwritten by S heffield.

Wynn would also be permitted to direct the after ma rket trading in these particular securities.

Three security offerings in particular epitomize th e scope of the illegal activity and are the subjects of cou nts 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 a nd Exchange Commission, Vista was represented as a bli nd pool, a company with no actual or anticipated busin ess operations. Vista's status was, however, misreprese nted. During the period of the IPO, Wynn arranged for a m erger 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 w ould become a public company. Wynn would then trade Vist a 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 wit hin 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 -- al locating the securities issued to accounts set up at Sheffie ld. Although the Vista prospectus stated that Sheffield , the underwriter, would make the final decisions concern ing stock distribution during the IPO, it was actually Wynn who directed the specifics of the offering. When invest ors outside Wynn's affiliations requested Vista stock, they wer e 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 actua l Vista stock certificates. If a "non-playing" customer tri ed to have Vista stock transferred and sold, Sheffield's clear ing agent would so advise Sheffield, who passed on the inform ation to Wynn. The only stock certificate transfers that She ffield

7authorized the clearing agent to effectuate were th ose

allocated to accounts associated with Wynn.

Wynn generated the demand for the Vista stock by offering inducements or bribes to brokers to have t heir 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. Al though he opted out of participation, he observed another broker putting a stock certificate into his briefcase. Wyn n advised
Marsala that what he witnessed was a broker receivi ng 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 induce d brokers to buy Vista stock. He also encouraged participation by offering non-public inside informa tion. In the case of Vista, brokers, including Haddy, were t old 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 throug h his consulting company, Skyline Capital Corp.

Although the Vista/Bima merger was arranged before the close of the Vista IPO, the Vista prospectus was no t timely amended to disclose the information. An expert for the SEC testified that if a blind pool company finds a prob able merger candidate before the close of its IPO, the c ompany must stop distributing its securities and file a po st-effective amendment with the SEC. Notice to the agency is req uired because a potential merger would amount to a fundam ental 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 sh ell

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2. A warrant is a right to acquire stock at a defin ed future time and at a specified price.

8company. 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-terrori sm business owned by G. Gordon Liddy3 wanted to merge with Castleton. Sheffield expressed its willingness to s ell Liddy a majority of the free-trading Castleton stock curren tly owned by Sheffield customers.

Wynn took over the helm of the Liddy deal. His consulting company, Skyline, entered into an agreem ent with Liddy for a 30-day exclusive right to find a m erger candidate for the Liddy company.

Once Wynn lined up the expected merger of Castleton and Liddy, he and his coconspirators began manipula ting the price of stock using the familiar four step pro cess. About 80% of the free-trading stock was acquired by the "players" from Sheffield customers who were not tol d of the

merger.

Haddy was among the brokers promised Castleton stoc k 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 wo uld receive stock, Haddy and his L'Argent customers bou ght 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 buyi ng. Sheffield, acting in accordance with Wynn's instruc tions as to bid and ask prices, then traded the stock in con formity with the previously arranged deals. Profits were th us guaranteed.

D. Count IV - Bellatrix Corp.

Count IV charged a manipulation scheme involving securities from the Bellatrix Corporation, also a b lind pool company engaged in an IPO underwritten by Sheffield . The pattern in the Bellatrix trading mirrored that of t he Vista

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

9stock manipulation -- "box" the IPO, manufacture de mand,

raise the price through controlled trading, and sel l 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 s econd day of after market trading when the FBI executed s earch warrants at Wynn's home and, on the next day, at th e offices of Sheffield Securities.

E. The Prosecution

On November 15, 1993, a federal grand jury in the District of New Jersey returned an indictment charg ing Eric Wynn, Brad Haddy, Anthony Nandino, Irwin Frankel an d Perry Constantinou with conspiracy to commit securi ties fraud contrary to 15 U.S.C. S S 77q(a) and 77x (Sec urities 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 2 40.10b5 (Rule 10b-5) in violation of 18 U.S.C. S 371 (Cou nt 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 v erdicts against Wynn and Haddy on all charges.4 Post-trial motions were denied.5 Haddy was sentenced to 27 months'

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4. The jury found Nandino not guilty on Count IV bu t could not reach a verdict on the remaining counts. Constantinou was a cquitted of all charges against him. Frankel pled guilty prior to t rial.

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 d isability which had prevented him from fully participating in his trial . At the government's request, the district court appointed a psychiatris t to examine Wynn. The district court then conducted a competency hear ing with testimony from the court-appointed psychiatrist and from the psychiatrist who had

10imprisonment and ordered to pay a special assessmen t of

$200. Wynn was sentenced to 52 months' imprisonment

, followed by three years of supervised release. A $5 0,000 fine was also imposed on Wynn.

II.

We first address whether Counts II, III and IV of t he 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 S tates 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 Bellatr ix (Count IV) securities.6 Wynn and Haddy contend that each individual transaction relating to the individual s ecurities should have been charged in a separate count. Charg ing an

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treated Wynn during trial. After the hearing and ar gument, the district court denied Wynn's motion to be declared incompete nt nunc pro tunc. The court also denied accompanying motions for a ne w trial based on Wynn's alleged incompetence and additional post-tri al motions brought by both defendants.

6. The relevant portion of Count II reads:

From at least as early as in or about Janua ry 1988, to at least as late as in or about December, 1988, in the D istrict of New Jersey and elsewhere, the defendants Eric Wynn . . . Brad Haddy . . . and others . . . knowingly and willfully employe d a scheme to defraud
in connection with the purchase and sale of Vis ta Securities, through
the use of means and instrumentalities of in terstate commerce and of the mails, in that they took actions desi gned to manipulate the price of Vista Securities, all as set forth in Count I of this
indictment.

In violation of Title 15, United States Cod e, 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 iden tification of the particular security and dates involved. The stock m anipulation related to Castleton (Count III) and Bellatrix (Count IV) occu rred between June and
December of 1988.

11overall scheme, they argue, renders the indictment faulty

because of its duplicity.

Duplicity is the improper joining of distinct and s eparate offenses in a single count. United States v. Starks , 515 F.2d 112, 116 (3d Cir. 1975). Duplicitous counts may con ceal the specific charges, prevent the jury from decidin g guilt or innocence with respect to a particular offense, exp loit the risk of prejudicial, evidentiary rulings, id. at 11 6-17, 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 cha rge 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) (multiplicit y7 case holding that indictment must follow statute creatin g 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 Con gress is, of course, the language of the statute. 15 U.S. C. S 78j(b), commonly known as section 10(b), by its title, pros cribes employment of manipulative deceptive devices in
connection with securities transactions. The sectio n reads:

S 78j. Manipulative and deceptive devices.

It shall be unlawful for any person, directl y or indirectly, by the use of any means or instr umentality of interstate commerce or of the mails, or o f 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

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7. Indictments charging a single offense in differe nt counts are multiplicitous. Multiplicity may result in multiple sentences for a single offense in violation of double jeopardy, or otherwi se prejudice the defendant. United States v. Cooper, 966 F.2d 936, 9 42 n.9 (5th Cir. 1992).

12registered, any manipulative or deceptive de vice or

contrivance in contravention of such rules a nd regulations as the Commission may prescribe as necessary or appropriate in the public inter est or for the protection of investors.

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

Under the authority of this section, the SEC promul gated Rule 10b-5 to execute enforcement of section 10(b). The regulation makes it unlawful for any person, in con nection with the purchase or sale of security, to (1) emplo y a device, scheme or artifice to defraud; (2) make any false s tatement of material fact; or, (3) engage in any act, practi ce or course of business that operates as fraud or deceit upon a ny person. The clear wording of the statute and the ru le thus emphasize the use of manipulative devices in descri bing the offense. The phrase "in connection with the purchas e or sale of securities" positions the illegal activity within the framework of the Securities Exchange Act; it does n ot 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 vehi cle to minimize fraud in securities trading. As the Court stated in Affiliated Ute Citizens of Utah v. United States, 4 06 U.S. 128, 151 (1972), "These proscriptions, by statute a nd rule, are broad and, . . . obviously meant to be inclusiv e." The legislation is construed " `flexibly to effectuate its remedial purpose,' " id. (quoting SEC v. Capital Gains Resea rch Bureau, Inc., 375 U.S. 180, 195 (1963)), not"techni cally and restrictively." Id.

The particular counts of the indictment before us t rack the statutory and regulatory language. They describ e the manipulative implementation of a securities trading scheme, the precise activity described in the statu te 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 pri ce and the sale at the profit, however, any particular tra nsaction might not be unlawful. Rather, the purchase or sale was intended to further the manipulation of the stock p rice.

13We thus conclude that the individual purchase or sa le

was not the appropriate unit of prosecution here; t hese retail events were only a step in the advancement o f the scheme as a whole. On the facts here, each count pr operly charged a manipulation of the securities of each of the three separate companies -- each involving a discre te
scheme.

In resolving this issue, we decline to dictate an i nflexible rule regarding the allowable unit of prosecution in a securities fraud case. The Federal Rules of Crimina l Procedure require that an indictment be a "plain, c oncise,
and definite written statement of the essential fac ts 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 themse lves 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 s ecurities 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 t hat it could not. In so concluding, the Eleventh Circuit r ecognized that the allowable unit of prosecution under sectio n 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 fals e 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 clar ified that in addition to the allowable prosecution of a schem e to defraud, it can be something less.

Finally, on this issue, we observe that even if the indictments were duplicitous, the error would be ha rmless. None of the concerns of duplicity have been implica ted. There is no allegation here that the integrity of t he prosecution was compromised by the particular struc ture of the indictment. Therefore, we conclude that counts II, III and IV of the indictment, each involving a course o f activity

14yet a single scheme, properly charged Haddy and Wyn n

with violations of the securities laws.

III.

Reliance Requirement

Haddy and Wynn also argue that their convictions sh ould be reversed because the government did not prove th at investors actually relied upon fraudulent and manip ulative practices in purchasing or selling the subject secu rities. The specific question is whether reliance is an ele ment of the crime of stock manipulation, proof of which is essential to conviction. We hold that no such statutory requi rement
exists.

The federal securities law were enacted largely in response to the stock market crash of 1929. Congres s recognized the need for investors to be protected a gainst fraud, and that if regulatory control in the securi ties 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 interes t of preventing practices that destabilized the securiti es market,
the Securities Act of 1933 and the Securities Excha nge Act of 1934 established systems requiring full disclosu re of material information by companies transacting in securities. Ernst & Ernst v. Hochfelder, 425 U.S. 1 85, 206 (1976). The Securities and Exchange Commission then promulgated Rule 10b-5 in 1942 to achieve the remed ial purposes of the 1934 Act. As we mentioned above, th e 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 de fine the
contours of the offense. Neither the statute nor th e rule includes a reliance requirement. Instead, both sect ion 10(b) and Rule 10b-5 prohibit the employment of manipulat ive and deceptive devices in connection with the purcha se or sale of securities.

Section 10(b)'s omission of reference to a particul ar victim is compelling evidence that investor relianc e is not

15required for a securities fraud conviction. The lan guage

does not proscribe deception on a purchaser or sell er of a security; instead it speaks to deceptive devices em ployed "in connection with the purchase or sale of any securit y." United States v. O'Hagan, 117 S. Ct. 2199, 2210 (19 97).

Rule 10b-5 also prohibits deceptive devices "as nec essary or appropriate in the public interest or for the pr otection of investors." Under this regulation, the SEC is autho rized to prohibit deceptive acts that it concludes would hav e deleterious effect on the integrity of the securiti es market and on investor confidence. See 15 U.S.C. S 78b (pu rpose 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 wh o 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 dev ice,
scheme or artifice to defraud in the offer or sale of any securities, requires that the deception be perpetra ted on the individual purchasing the stock. In Naftalin, an in vestor 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 actual ly purchased the shares. Naftalin argued that the 1933 Act's prohibition against fraud "in" the offer of the sal e of securities was narrower than section 10(b)'s proscr iption against deception "in connection with" the purchase or sale and, accordingly did not encompass deception direct ed 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 requi ring 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, th en deception "in connection with" a securities transac tion per the 1934 Act does not have such a requirement.

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

(1975) concerned a private right of action under th e securities laws, but is nonetheless instructive on the question of reliance by identifiable victims in a c riminal case. In Blue Chips, the Court limited the class of persons who may bring an action under section 10(b) and Rul e 10b5 to those who would actually purchase or sell secu rities. The Court imposed the purchase or sell requirement for standing purposes - recognizing the danger of litig ation by investors who did not make an actual purchase but w ho might later claim that they would have but for the alleged deceptive conduct. Id. at 747. Significantly, in Na ftalin, the Court made clear that the purchaser-seller standing rule of Blue Chips is "inapplicable" to a criminal prosecut ion. 441

U.S. at 774 n.6.

The statutory term "manipulation" also detracts fro m 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 virt ually 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 devise d a scheme by which the prices of certain securities di d 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 insid er information, and the offering of bribes had the imp act of artificially influencing market activity. A particu lar investor's reliance on the representations is the a nticipated 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 t heory, securities fraud is committed when a person, in con nection with a securities transaction, misappropriates conf idential information in breach of a duty to the source of th e 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 compa ny that was planning to acquire a second company. Duri ng the

17preparation stages of the acquisition, O'Hagan purc hased

call options for the target company stock, as well as shares in the target company. Following the public announc ement of the tender offer, the lawyer exercised his call options, liquidated his position and realized a profit in ex cess 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 Co urt noted that the theory comports with 10(b)'s languag e, which requires deception "in connection with the pu rchase or sale of any security," not deception of an indiv idual purchaser or seller. Id. At 2210. Thus, although O' Hagan differs by virtue of the theory the prosecution pur sued, 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 particul ar victim. What distinguishes misappropriation from manipulati on 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 informati on, in most instances, the corporation involved. This dist inction does not change the fact that the integrity of the free market has been compromised.

We therefore conclude that reliance on the deceptiv e practice by an identifiable victim participating in a securities transaction is not required for convicti on in the type of stock manipulation case before us.8

___________________________________________________ ______________

8. United States v. Russo, 74 F.3d 1383 (2d Cir. 19 96), is not to the contrary. In Russo, the defendants were convicted i n a stock manipulation scheme which involved short sales of h igh value stocks by a market maker to generate false credits in an acco unt 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 s ecurities fraud, it must find that the clearing broker was deceived. Th e Court of Appeals
for the Second Circuit held that the instruction wa s proper because "it fairly apprised the jury of the essence of the defe nse theory...." Id. at 1393. The case did not hold, nor was it an issue, t hat reliance is a required element in a securities fraud case.

18IV.

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

19