Source: http://openjurist.org/548/f2d/1315
Timestamp: 2015-09-04 16:34:23
Document Index: 236006810

Matched Legal Cases: ['§ 7206', '§ 371', '§ 80', '§ 2', '§ 80', '§ 270', '§ 80', '§ 78', '§ 240']

548 F2d 1315 United States v. Brashier | OpenJurist
548 F. 2d 1315 - United States v. Brashier Home
548 F2d 1315 United States v. Brashier 548 F.2d 1315
Fed. Sec. L. Rep. P 95,827, 1 Fed. R. Evid. Serv. 1285UNITED STATES of America, Plaintiff-Appellee,v.Hunter Brooks BRASHIER, Defendant-Appellant.UNITED STATES of America, Plaintiff-Appellee,v.John Michael COUGHLAN, Sr., Defendant-Appellant.
Nos. 75-3375, 75-3453.
Dec. 29, 1976.
S. Thomas Pollack (argued), of Irell & Manella, Los Angeles, Cal., for appellant in 75-3375.
Joseph A. Ball (argued), Los Angeles, Cal., for appellant in 75-3453.
Joel Levine, Asst. U. S. Atty. (argued), Los Angeles, Cal., Andrew D. T. Pfeffer, Asst. U. S. Atty. (argued), Los Angeles, Cal., for appellee.
Before WRIGHT and TRASK, Circuit Judges, and PALMIERI,* Senior District Judge.
Brashier and Coughlan appeal their convictions for criminal violations of the Investment Company Act of 1940 (Act)1 as the result of illegal concurrent investments. Brashier also appeals a judgment of conviction for filing a false 1971 federal income tax return in violation of 26 U.S.C. § 7206(1).2
Appellants raise numerous issues on appeal. Finding no reversible error, we affirm.
1. The Transaction.
Viewing the facts, as we must, in the light most favorable to the government, the jury could have found that the appellants were involved in a complex scheme of illegal simultaneous investments.
The Shamrock Fund, a registered investment company under the Act,3 once was a profitable mutual fund. Organized in 1968 by Robert and Dorothy Wiest, the Fund quickly prospered and its investment portfolio grew to a level of $7.5 million by September 1971.
During this time the Lincoln Management Corporation handled the Fund's investment portfolio and operating needs as a management investment company.4 Lincoln Management's portfolio manager prior to November 5, 1971 was the Fund's founder, Mr. Wiest.5
His ouster as portfolio manager in November 1971 was precipitated by the increasing financial plight of the Fund. Excessive redemptions, a deteriorating investment portfolio and a past due loan of $1 million were at the heart of Shamrock's difficulties. Within six months the Fund's net asset value plummeted from $7.5 million to $320,000. As a result, in March 1972 Shamrock attained the dubious distinction of becoming the first major mutual fund to enter receivership.
Co-defendant Robert Alden Rhoads, lacking investment experience, became Lincoln Management's portfolio manager after Wiest's removal. He was confronted immediately with two pressing, and interrelated, needs. Lincoln Management required an infusion of new funds and Shamrock needed stocks with the potential for rapid appreciation in order to buoy the sagging value of its assets.
The needs of Lincoln Management and Shamrock were communicated to Brashier and Coughlan. The stage was set to complete the transition from the Fund's "go-go" mood of the 60's6 to its hustle of the 70's.
Coughlan was a major shareholder and officer in Newport Western, Inc., a large block of whose stock was owned by Shamrock. Aware of Shamrock's and Lincoln Management's financial problems, Coughlan met with Rhoads soon after the latter became the Fund's portfolio manager.
Coughlan suggested to Rhoads that Kardar Canadian Oils, Inc. would be a good growth stock for acquisition by Shamrock. He also mentioned that the owner of the Kardar Oil stock might be interested in a concurrent investment in Lincoln Management. Soon thereafter, Shamrock purchased $325,000 in Kardar Oil stock at the same time the President of Kardar Oil invested $80,000 in Lincoln Management.
After the Kardar transaction was closed, Coughlan recommended to Rhoads a similar deal involving another growth security, Advance Container Corporation. Rhoads was told that Brashier, the seller of the Advance Container stock, would be willing to make a concurrent investment in Lincoln Management. Brashier was the manager of several limited investment partnerships through his investment company, Pilot Management Corporation.
A meeting was arranged among the three principals to discuss the proposed transaction. Brashier promoted the stock at the meeting and Rhoads agreed to purchase, in several installments, Advance Container stock for Shamrock's portfolio. In return Brashier agreed to make a simultaneous investment in Lincoln Management. The instant charges resulted from this transaction.
The initial terms of the transaction called for Shamrock to buy 5,500 shares of Advance Container at a price midway between the stock's bid and asked quotations on the over-the-counter (OTC) market. Brashier then was to invest $25,000 of the sale price received from Shamrock in Lincoln Management. The parties also agreed to subsequent similar transactions.
The first Advance Container stock transaction was closed at a price of $22 per share. Rhoads ordered the shares through William Anderson of Pacific Western Securities, a broker selected by Brashier. The shares were supplied by Brashier and other persons. Brashier's shares were owned through his nominee, Marcelline Fritts.
Payment of the $122,375 purchase price was made by Shamrock to Pacific Western in two installments. Upon receipt of these payments, Anderson, the broker, delivered a cashier's check for $84,375 to Pilot Management Corporation, the company owned by Brashier and in whose name the brokerage account at Pacific Western was held.
Thereafter, Brashier instructed his secretary at Pilot Management to purchase four cashier's checks for him. One for $15,000 was payable to Newport Western for payment to Coughlan. A check for $27,250 was made payable to Gerald Azzarone, a business associate of Brashier. A third for $5,000 was payable to another Brashier company, Serendipity Products. Additionally, a sum of $8,625 was wired to another Brashier associate, Alfred Mattei. A fourth check was purchased for $25,000 and made payable to Lincoln Management.
Rhoads' testimony at trial indicated that the last check was not a loan, but an investment by Brashier in Lincoln Management as previously agreed upon among the parties. Rhoads further stated that without this payment, he would not have purchased the Advance Container stock.
At no time was the SEC notified of this joint transaction involving both Shamrock and Lincoln Management, nor was SEC approval given for such a plan.
The Advance Container stock remained in Shamrock's portfolio when it entered receivership in March 1972. Efforts by the receiver to sell it were unsuccessful. Advance Container's bankruptcy in 1973 caused the shares to become virtually worthless.
The tax charge against Brashier also stems from the Advance Container stock transaction. Two months prior to it, Brashier asked Marcelline Fritts, his part-time secretary, to act as the nominee owner for some stock he was about to acquire. He explained that he did not wish the shares available to his wife in the event of a divorce. Fritts was told by Brashier that he, not she, would be the actual owner of the Advance Container shares and would be responsible for reflecting their ownership on his tax returns. Fritts agreed.
Brashier then obtained 4,400 shares of Advance Container stock at a new offering for $5 per share. The shares were placed in Fritts' name. After their sale to Shamrock for $22 per share, the I.R.S. computed the capital gain realized by Brashier as in excess of $50,000. This figure includes a credit of $25,000 in favor of Brashier from his payment to Lincoln Management. Brashier's 1971 federal income tax return, filed with the I.R.S., failed to reflect any capital gains in 1971 from the sale of Advance Container or any other security.
2. The Statute And The Offenses.
The offenses, except the related tax charge, arise under the Act, a fundamental purpose of which is to prevent self-dealing on the part of those managing and controlling investment companies and to protect shareholders in the funds from dishonest and self-dealing advisers. The legislation followed a major SEC study of investment trusts and investment companies.7
The SEC study documented significant problems with insider self-dealing, the use of investment companies as dumping grounds for securities otherwise unmarketable, and the manipulation of portfolios to suit the needs of insiders.8
The legislative intent of the Act clearly intended to proscribe the kind of illegal scheme among insiders alleged in this case.9 The transaction was permeated with conflicting interests, an absence of arm's length dealing and opportunities for overreaching.10
As do the other statutes implementing the federal regulatory scheme with respect to securities, the Act, with the exception of Section 37,11 contains no specific language to indicate when a proscribed act will constitute a criminal offense. The statute, instead, relies on a "Penalties" section containing three operative provisions.12
First, a willful violation of any substantive provision, or rule or regulation promulgated under the statute, is a crime. Second, the Act provides a mitigation clause. If the defendant proves he had no actual knowledge of a rule or regulation under the statute then he cannot be convicted under the Penalties section. Third, the statute provides maximum penalties upon conviction.13
The federal grand jury returned a six-count indictment naming Brashier, Coughlan and Rhoads as defendants.
Count One alleged that all defendants conspired to violate the Act by defrauding the Fund, a registered investment company, in violation of 18 U.S.C. § 371.14
Counts Two through Four alleged substantive offenses under the Act. Count Two charged the three defendants with causing the funds of the Shamrock Fund to be converted to the use of another, 15 U.S.C. § 80a-36 and 18 U.S.C. § 2.15 The government's theory, in essence, was that the pre-arranged, secret payment by Brashier of $25,000 from the sale of the Advance Container stock back to Rhoads or Lincoln Management constituted a conversion of the Fund's property.
Count Three alleged that Rhoads and Shamrock Fund's management company, Lincoln Management, engaged in a three-sided transaction wherein Shamrock and Brashier bought and sold Advance Container stock and Brashier paid $25,000 of the sale price to Lincoln Management. It is a violation of 15 U.S.C. § 80a-17(d)16 and 17 C.F.R. § 270.17d-1 to effect a joint transaction between "affiliated persons"17 and the mutual fund with which they are affiliated. Appellants were charged with aiding and abetting the commission of this offense.
As affiliated persons of the registered investment fund, Rhoads and Lincoln Management were indicted in Count Four for unlawfully accepting compensation for the purchase of property for the Shamrock Fund from a source other than the regular salary paid by the investment company in violation of 15 U.S.C. § 80a-17(e).18
Count Five alleged that the three defendants used the means and instrumentalities of interstate commerce and the mails to defraud the Shamrock Fund in connection with the purchase of a security, 5,500 shares of Advance Container, in violation of the antifraud provisions of the Exchange Act of 1934, 15 U.S.C. § 78j(b)19 and Rule 10b-5, 17 C.F.R. § 240.10b-5.
Count Six alleged that Brashier filed a materially false federal income tax return for 1971. The indictment charged that Brashier reported no capital gains for that year when, in fact, he realized a capital gain of approximately $50,000 from the sale of his Advance Container shares.
Co-defendant Rhoads pleaded guilty to the conspiracy count prior to trial and was a principal government witness.
A jury trial began on August 26, 1975. After the prosecution rested, a motion for judgment of acquittal on Count Five, the 10b-5 violation, was granted as to both appellants. On September 11, 1975, the jury returned guilty verdicts against Brashier and Coughlan as to Counts One through Four. Brashier also was convicted on Count Six, the tax charge.