Source: https://law.justia.com/cases/federal/appellate-courts/F2/328/854/418393/
Timestamp: 2019-09-21 05:10:59
Document Index: 406748755

Matched Legal Cases: ['§ 5', '§ 77', '§ 24', '§ 77', '§ 1341', '§ 24', '§ 17', '§ 2', '§ 215', '§ 1341', '§ 37', '§ 80']

United States of America, Appellee, v. Martin Benjamin, Bernard Howard and Milton Z. Mende, Defendants-appellants, 328 F.2d 854 (2d Cir. 1964) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1964 › United States of America, Appellee, v. Martin Benjamin, Bernard Howard and Milton Z. Mende, Defendan...
United States of America, Appellee, v. Martin Benjamin, Bernard Howard and Milton Z. Mende, Defendants-appellants, 328 F.2d 854 (2d Cir. 1964)
US Court of Appeals for the Second Circuit - 328 F.2d 854 (2d Cir. 1964) Argued December 4, 1963Decided February 17, 1964
COPYRIGHT MATERIAL OMITTED Menahem Stim, New York City (Curran, Mahoney, Felix & Stim, New York City) (Allen S. Stim, John F. Kelly, New York City, of Counsel), for appellant Bernard Howard.
This appeal concerns another of those sickening financial frauds which so sadly memorialize the rapacity of the perpetrators and the gullibility, and perhaps also the cupidity, of the victims. It is unusual in that the vehicle, American Equities Corporation, owned nothing at all — and, in a happier sense, in that the SEC was able to nip the fraud quite early in the bud. The appellants are Milton Mende, the principal promoter, Martin Benjamin, his lawyer, and Bernard Howard, a certified public accountant. After trial in the District Court for the Southern District of New York before Judge Palmieri without a jury, all three were convicted of conspiring willfully by use of interstate commerce to sell unregistered securities and to defraud in the sale of securities, in violation of the Securities Act of 1933, §§ 5 (a) and (c), and 17(a), 15 U.S.C. §§ 77e (a) and (c), and 77q(a), sections which are implemented criminally by § 24 of the Act, 15 U.S.C. § 77x. Mende and Benjamin were convicted also on three substantive counts for using the mails in furtherance of the fraudulent schemes in violation of 18 U.S.C. § 1341. As their sentences on the latter counts were the same as those on the conspiracy count and run concurrently with them, and as we are satisfied that their conspiracy conviction was proper, we need not concern ourselves with the mail fraud counts. Lawn v. United States, 355 U.S. 339, 362, 78 S. Ct. 311, 2 L. Ed. 2d 321 (1958).
It is true that the Government had not merely to show that the statements were false but to present evidence from which the judge could be convinced beyond reasonable doubt of Howard's culpable state of mind. But, as Judge Hough said for this court years ago, "when that state of mind is a knowledge of false statements, while there is no allowable inference of knowledge from the mere fact of falsity, there are many cases where from the actor's special situation and continuity of conduct an inference that he did know the untruth of what he said or wrote may legitimately be drawn." Bentel v. United States, 13 F.2d 327, 329 (2 Cir.), cert. denied sub nom., Amos v. United States, 273 U.S. 713, 47 S. Ct. 109, 71 L. Ed. 854 (1926). Any accountant must know that his obligations in certifying "pro forma" statements are not satisfied by any such arithmetical exercise as Howard performed. But, as our description of the reports has indicated, there were further false assertions, some of them clearly known to Howard to be such; these constituted a basis for holding him that was independent of the falsity of the total report, as well as for discrediting his assertions of ignorance as to what was required of him. The Michigan real estate was represented to Howard not as properties to be acquired but as already owned; he claimed to have seen deeds for these properties but admitted that American Equities was not named as grantee. The statements that certain assets had not been "verified by direct communication" implied that with this qualification all assets had been verified by suitable means; they had not been. Howard made no examination of American Equities' books, which, indeed, were not available when he rendered his first report; even a most cursory inspection would have revealed that nothing had been paid when the capital stock account was written up ten-fold. His statement purported to reflect "an accurate and true picture of the corporation's net worth after taking into consideration the proposed loan by the officers"; at best it would have been accurate only if the corporation had had at least some contractual basis for the assertion of ownership, and even then only if proper provision had been made for the cost. The inclusion as an asset of over $700,000 of "Unrecovered Development Costs" of a dormant mining company known to have been through insolvency proceedings was wholly indefensible. Perhaps most damning of all was the making of a profit and loss statement including a positive assertion that the six companies were "acquired within the last few months," when Howard knew that at least some of them had not been acquired at all.
In fact, however, the Government was not required to go that far. "Willful," the Supreme Court has told us, "is a word of many meanings, its construction often being influenced by its context." Spies v. United States, 317 U.S. 492, 497, 63 S. Ct. 364, 367, 87 L. Ed. 418 (1943), citing United States v. Murdock, 290 U.S. 389, 394-396, 54 S. Ct. 223 78 L. Ed. 381 (1933). We think that in the context of § 24 of the Securities Act as applied to § 17(a), the Government can meet its burden by proving that a defendant deliberately closed his eyes to facts he had a duty to see, compare Spurr v. United States, 174 U.S. 728, 19 S. Ct. 812, 43 L. Ed. 1150 (1899) and American Law Institute, Model Penal Code, § 2.02(7), commentary in Tent. Draft No. 4, pages 129-30 (1955), or recklessly stated as facts things of which he was ignorant. Judge Hough so ruled in Bentel v. United States, supra; although that case and the similar ruling in Slakoff v. United States, 8 F.2d 9 (3 Cir. 1925), were under the mail fraud statute, § 215 of the then Criminal Code, 35 Stat. 1130 (1909), the ancestor of 18 U.S.C. § 1341, which does not use the term "willfully," the Congress that passed the Securities Act scarcely meant to make life easier for defrauders. Other circuits have gone further and have held the willfulness requirement of the Securities Act to be satisfied in fraud cases by proof of representations which due diligence would have shown to be untrue. Stone v. United States, 113 F.2d 70, 75 (6 Cir. 1940); United States v. Schaefer, 299 F.2d 625, 629, 632 (7 Cir.), cert. denied, 370 U.S. 917, 82 S. Ct. 1553, 8 L. Ed. 2d 497 (1962). In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar. Of course, Congress did not mean that any mistake of law or misstatement of fact should subject an attorney or an accountant to criminal liability simply because more skillful practitioners would not have made them. But Congress equally could not have intended that men holding themselves out as members of these ancient professions should be able to escape criminal liability on a plea of ignorance when they have shut their eyes to what was plainly to be seen or have represented a knowledge they knew they did not possess. Compare Brown v. Bullock, 294 F.2d 415, 420 (2 Cir. 1961), as to the meaning of willful conversion in § 37 of the Investment Company Act, 15 U.S.C. § 80a-36.
Much of what we have said as to Howard is relevant also to Benjamin's claim of insufficiency of the evidence as to his culpable state of mind. Benjamin brought Howard into the scheme; he had written out the list of assets which Howard later used in his first report; as Howard testified, Benjamin had told him to take the statements of the various companies "and just put them into a consolidated form"; and his work in connection with several of the proposed "acquisitions" gave him actual knowledge of the falsity both of the November 30 statement and of Howard's reports. But there was much more than this. His opinion letter made a positive statement that he believed all the shares of American Equities were exempt from registration, although he must have known that control of the corporation, not yet even named "American Equities Corporation," was being acquired by Mende and that the statute explicitly denied exemption to any new offerings by persons in control, a limitation of which his testimony before the SEC showed he was well aware. Yet there is abundant evidence that Benjamin knew Mende was putting American Equities shares on the market. Among the instances was the transaction outlined above with Drattell in late January wherein Benjamin received a confirmation of a purchase of 5,000 shares from "Martin Benjamin Trustee" for $9,000 — at a time when the pink sheets were quoting the stock at $5 per share or more — and the distribution of part of the proceeds to Mende and his wife; yet Benjamin prepared a letter whereby the transfer agent certified these shares to be "free stock and * * not investment stock." In another transaction, not previously mentioned, wherein Mende had a nominee, Mrs. Tanner, sell American Equities shares to relatives and friends of Paul Reicher, her father, on a basis whereby she retained $2 per share for her pains, she received a letter signed by "Martin Benjamin Trustee" acknowledging the sale of 11,000 shares to her and the receipt of $4.75 per share. Benjamin's role was far more than that of an attorney. He told Drattell he was acting as a "trustee" for some of the principals and, when Drattell sought elucidation, explained that "as a trustee and as an attorney * * * licensed in the State of New York, * * * he was not obligated to reveal any of the sources and it is enough for anyone to accept a legal document from a trustee who was an attorney and the trustee was not required to reveal the source of the legal document or who the principals were behind the legal document" — surely a novel contribution to the law of trusts. His proffer of financial aid if Drattell would undertake some distribution of American Equities afforded further basis for inferring knowledge of the intended fraud, as did his efforts falsely to minimize Mende's role when he and others were examined by the SEC. This and other evidence made a case at least as strong as that held sufficient with respect to another lawyer in United States v. Crosby, 294 F.2d 928, 938 (2 Cir. 1961), cert. denied sub nom. Mittelman v. United States, 368 U.S. 984, 82 S. Ct. 599, 7 L. Ed. 2d 523 (1962).
Howard and Benjamin make the complaint, standard in appeals of this sort and buttressed by the inevitable citation of Kotteakos v. United States, 328 U.S. 750, 66 S. Ct. 1239, 90 L. Ed. 1557 (1946), that although the indictment alleged a single conspiracy, the proof showed separate ones to sell unregistered securities and to defraud. The argument could not avail Benjamin in any event since the evidence clearly implicated him in both aspects of the scheme. See United States v. Agueci, 310 F.2d 817, 827-828 (2 Cir. 1962), cert. denied, 372 U.S. 959, 83 S. Ct. 1016, 10 L. Ed. 2d 12 (1963). But the point is wholly without merit. The fraudulent acts and the unlawful failure to register information which would uncover them were essential steps in a single scheme to dupe; the limited scope of Kotteakos was explained in Blumenthal v. United States, 332 U.S. 539, 558-559, 68 S. Ct. 248, 92 L. Ed. 154 (1947) and its inapplicability to an integrated financial fraud like this was affirmed by us in United States v. Crosby, supra, 294 F.2d at 944-945. It is thus immaterial that the evidence may not have shown awareness by Howard of the part of the scheme that involved the sale of unregistered shares, United States v. Agueci, supra, and cases there cited.
Howard objected to the admission of this evidence on the ground that Drattell, who had not previously met him, could not identify his voice. It is true that the mere announcement of identity by a person who has placed a telephone call does not suffice to make it admissible against the person so identified. See 7 Wigmore, Evidence 617 (3d ed. 1940), and United States v. Ross, 321 F.2d 61, 69 (2 Cir.), cert. denied, 375 U.S. 894, 84 S. Ct. 170, 11 L. Ed. 2d 123 (1963). But Wigmore rightly differentiates the case "of B's first calling up A and being answered by a person purporting to be A." In Van Riper v. United States, 13 F.2d 961, 968 (2 Cir.), cert. denied sub nom. Ackerson v. United States, 273 U.S. 702, 47 S. Ct. 102, 71 L. Ed. 848 (1926), Judge Learned Hand approved decisions "that when a witness calls up at the proper number in a telephone book the person whose admissions are relevant, and gets an answer from one professing to be the person called, it is prima facie proof of identity." See also United States v. Rosenberg, 195 F.2d 583, 597 (2 Cir.), cert. denied, 344 U.S. 838, 73 S. Ct. 20, 97 L. Ed. 687, rehearing denied, 344 U.S. 889, 73 S. Ct. 134, 97 L. Ed. 652 (1952); United States v. Bucur, 194 F.2d 297, 303-304 (7 Cir. 1952). The evidence here went far beyond what Judge Hand thought should suffice as "prima facie proof of identity." Drattell called the number given in Howard's December, 1960, report, was answered by a man identifying himself as "Bernard Howard," discussed the report with the answering voice, was given another number which Howard admits to be his, called that number, was answered by the same voice which again discussed American Equities and was later called by the same voice for a further discussion. To say that all this did not establish Howard's identity sufficiently to make the conversation admissible would outrage common sense.