Earl Warren: Number 66, Isadore Blau, etc., Petitioner, versus Robert Lehman et al. Mr. Levy.
Morris J. Levy: Mr. Chief Justice and may it please the Court. This matter is presently before this Court pursuant to its order which granted petitioner's application for writ of certiorari to review the judgment of the Circuit Court of Appeals for the Second Circuit which affirmed, by divided Court, the trial court judgment, dismissing the complaint as to the respondents, Lehman Brothers, and affirming the judgment as against the respondents Thomas. The action was originally commenced by the petitioner, a stockholder of Tide Water Associated Oil Company, on its behalf, to recover short-swing profits realized by Lehman Brothers from its transactions in the stock of Tide Water. This action was brought pursuant to Section 16 (b) of the Securities Exchange Act of 1934 which, in substance, provides that, for the purpose of preventing the unfair use of information which may have been obtained by a director, an officer, or a 10% stockholder, any profit realized by such person shall be recoverable by the issuer or if the issuer fails to sue by a stockholder who brings such action on its behalf. Pursuant to the man upon Tide Water and its failure to commence such suit, the petitioner as a stockholder did commence such suit. Now, the issue involved here is the interpretation to be given to Section 16 (b), whether or not the Congressional purpose expressly stated by Congress should be carried out or whether the literal language of the statute should be followed. Another issue involved here is whether or not the Securities and Exchange Commission has the power to formulate and make rules which Congress specifically allowed it to make and what effect the Court should give to such rules in interpreting the purpose of Section 16 (b). Now, before going into the facts of the case, I think it would be advisable to go into the history of the Securities Exchange Act of 1934. Your Honors will recall that, in 1929, there was a stock market crash and which vividly brought to the attention of Congress the fact that there was looseness in National Stock Exchanges, there were manipulations by insiders, and there were gen -- the general makeup of the market and the sale and purchase of securities were such as to put the investors generally in a very bad position as compared to the persons who are in the inside of the corporation. Extended hearings were held before the Congressional committees and, pursuant to such hearings, Congress decided to enact the Securities Exchange Act of 1934 and its general purpose was to protect the investors to prohibit market manipulation and to maintain fair and free markets so that investors throughout the country might go into the market and purchase or sell securities knowing that there are no inside manipulations which cause the prices to go up or down. Now, closely alike to this general purpose for the enactment of Section 6 -- the enactment of the Securities Exchange Act of 1934 was the furnishing of reports by insiders. Congress found that insiders had used their confidential knowledge of the corporation to manipulate stock, to purchase stock, to sell stock based upon such knowledge and that the investors were at a great disadvantage because of that. So, Congress decided to require these insiders such as officers, directors, and principal stockholders who could have use of such inside information and who are in such a position to get it to furnish reports of their purchases or sales of stock. And, in order to deter them from making use of confidential information, they inaugurated a plan whereby if the director or officer or principal stockholder purchased and sold a security of an issuer which was listed upon the National Security Exchange, if such transaction occurred within a period of less than six months, this -- the profit realized by such insider was recoverable from him regardless of his intention -- as stated in the Section, regardless of his intention of rep -- of not repurchasing the securities sold or of not selling the securities purchased within a period of six months.
Potter Stewart: Mr. Levy.
Morris J. Levy: Yes, sir?
Potter Stewart: This legislation did not apply to insiders such as directors, officers, and majority stockholders, did it? It applied specifically and expressly and exclusively to directors, officers, and stockholders who held 10% or more of the equities -- securities, isn't that correct?
Morris J. Levy: The statute, as finally enacted, did state that it applied only to directors. It didn't state the word “only.” It actually stated, for the purpose of preventing the use of unfair information, any purchase or sale by a director, an officer, or 10% stockholder. It should be --
Potter Stewart: So it didn't say insider such as these people?
Morris J. Levy: No, it did not.
Potter Stewart: That's -- I just -- you told us that's the--
Morris J. Levy: That's right, but I went to the purpose of the statute, and the purpose of the statute was to prevent the use of inside information which might be obtained by an officer, director, or principal stockholder.
Potter Stewart: As defined?
Morris J. Levy: Not as defined. Principal stockholder was later defined. In other words, they used a rule of thumb. Originally, they -- as a matter of fact, they wished to make a person liable who owned only 5% of the stock. As a matter of fact, there were discussions as to whether or not a person, a director, an officer who disclosed confidential information to a third party, whether or not he should be held liable. And of course, in view of the administrative difficulties in proving that such disclosure was made, Congress dropped that end of it and merely decided to incorporate the words “director, officer, or 10% stockholder.”
John M. Harlan II: Does it appear that they dropped it because of administrative difficulties or because they didn't approve it?
Morris J. Levy: No, of administrative difficulties.
John M. Harlan II: Is it?
Morris J. Levy: Yes, sir.
John M. Harlan II: Where does that appear?
Morris J. Levy: That appears in -- on page 18 of my brief. In the course of Congressional hearings, one of the draftsmen of the Act testified that Section 16 (b) is designed to reach an insider short-swing profits irrespective of any intention or expectation to sell the security within six months since it is absolutely impossible to prove the existence of such intention or expectation. And, you have to have this crude rule of thumb because you cannot undertake the burden of having to prove that the director intended, at the time he bought, to get out on a short-swing.
Potter Stewart: Well then, under the statute, a director must disgorge, even though he were completely (Inaudible), is that right?
Morris J. Levy: That's correct, sir.
Potter Stewart: But, also under the statute, a stockholder who owns only 9% of the stock is not affected by the statute at all.
Morris J. Levy: That's correct.
Potter Stewart: No matter how much inside knowledge he used?
Morris J. Levy: That's right, sir. Now, I refer Your Honors to Section 2 of the Securities Exchange Act of 1934 whereby Congress specifically stated its purpose for enacting the statute in general in these words, and it said, “Transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, and to impose requirements necessary to make such regulation and control reasonably complete and effective, and insure the maintenance of fair and honest markets in such transactions.” And, of course, they go on for about a page and a half setting forth why -- the reasons why the -- that such transactions are affected with a national public interest. Now, in construing Section 16 (b) of the Securities Exchange Act of 1934, the Courts have recognized that this type of statute is a remedial statute and that, in order to give it the meaning which Congress intended, there must be a broad application of its terms. And, the courts have gone out of their way to make certain that there would not be any loophole wherein an insider could transcend the purposes of the statute and realize for himself a short-swing profit denied to other investors. Under Section 16 (a) of the Securities Exchange Act, provision is made that an insider must file certain reports with respect to his transactions showing the change of ownership. Section 16 (b), as I've stated before, provides for the recovery of short-swing profits realized by such insider. Now, it's remarkable to note at this point that there were certain exemptions from the operation of the statute which Congress specifically incorporated in the Act. For instance, in Section 16 (b), there is exempt from its operation any acquisition of stock received in payment of a debt contracted in good faith. Otherwise, the person who has contracted a debt, who -- to whom money is owed, obtain stock for the payment of his debt and, if that was done in good faith, the acquisition of the stock is not considered a purchase. Now, Section 16 (b) further provides that foreign and domestic arbitrage transactions are exempted unless, and the statute specifically says, “Unless it is made contrary to such rules and regulations as the Commission may make for the purpose of carrying out the purposes of this statute.” Thus, by granting this automatic exemption, under this provision of the Act, and permitting the Commission to make rules avoiding such exemption, it would appear that the Commission has the implied authority to make such rules as it deems proper to carry out the purposes in other cases. And, this is what the Commission actually did. Now, about 15 years ago, the Commission decided to promulgate a rule whereby a director who was a partner of a firm who had traded in securities was required to report his proportionate share of the purchases or sales effected by his firm. Subsequently, this rule was changed, and this rule was changed by the Commission after a case was decided by the Second Circuit, Rattner against Lehman, which is in direct contravention to the purposes for which the statute, Section 16 (b) was enacted. I think I can get now to the facts of this case and I think you have a history of the statute in general. I think the facts now will show that in its application, the Court did not apply the proper interpretation.
William O. Douglas: Was the Commission regulation enforced when this transaction took place?
Morris J. Levy: Yes, sir.
Charles E. Whittaker: That regulation, as I understand it, merely required the partner director to report to the Commission his share in this transaction. Is that right?
Morris J. Levy: That's right, sir. That was -- that was before this case. When this case was in existence, he was required to report all the transactions of his partnership.
Charles E. Whittaker: The problem -- this is the problem. That's the prior rule --
Morris J. Levy: That's right.
Charles E. Whittaker: -- exactly?
Morris J. Levy: That's right.
William O. Douglas: The one that was enforced when this transaction took place is the one that you printed on page 53 of your brief?
Morris J. Levy: That's right, sir. Now --
William O. Douglas: Was that one on page 53 later recalled?
Morris J. Levy: No, it was not. It still is -- it still is in existence. Now, the facts of this case are as follows, Lehman Brothers is a New York partnership composed of approximately 17 partners. Prior to August of 1954, Mr. John Hertz, who was a partner of Lehman Brothers, was a director of Tide Water Associated Oil Company. His testimony is that he joined Lehman Brothers in 1934 to bring business to Lehman Brothers and that he joined Tide Water as a director to bring business -- its business to Lehman Brothers. And he further testified that his joint -- his being a director certainly did bring Lehman Brothers business. He further testified that, during the course of his being a director, he gossiped about the affairs of Tide Water to his partners, discussed the matters with them, and that, of course, in the course of financing which Lehman Brothers did for Tide Water, he, as a director, was the person in charge of that and he discussed the matters with his partners since he had more knowledge of its affairs. Some time prior to August of 1954, Mr. Hertz decided to resign his directorship from Tide Water and he came over to his partner -- his fellow-partner, Mr. Thomas and said, “Mr. Thomas, how would you like to become a director of Tide Water?” Mr. Thomas said he would. So, Mr. Hertz called up the President of Tide Water and said “Mr. Staples, I have a smart young man here who is my partner. I'd like to have him become a director in my place.” And, within a short time, of course, Mr. Thomas was appointed a director of Tide Water and his appointment was effective as of the date when Mr. Hertz's resignation took effect. On the same date, one went in -- went out and the other went in.
Charles E. Whittaker: Did you say appointed? Is that the way it's done?
Morris J. Levy: He was the one -- he was appointed at that time because the -- it was an interim term.
Charles E. Whittaker: Oh, I see.
Morris J. Levy: Now, Mr. Hertz testified that, before his resignation had become effective from the Tide Water Board, there was some discussion amongst the members of the Tide Water Board concerning the issuance by Tide Water of a preferred stock which could be converted -- which could be into which the common could be converted, the common which was outstanding. There was also some discussion with respect to the refinancing of a new refinery for Tide Water. And that Mr. Hertz admitted that he discussed these matters with his partners in Lehman Brothers. Now, after Mr. Hertz have resigned from Lehman -- from Tide Water, Mr. Thomas admitted that, on several occasions, he was asked by his partners at Lehman Brothers what he thought of the business, the prospects of Tide Water, and that he had answered them and told them that the prospects were very good and that it should be a good investment. And his testimony indicated that he had spoken in this fashion to at least six of his partners at Lehman Brothers, including one, a Mr. Hammerslough who actually gave the orders to Lehman Brothers to purchase -- to commence purchasing Tide Water stock involved in this case. Now, without a short time after such discussion with Mr. Thomas, Mr. Hammerslough told his office to start purchasing common stock of Tide Water and, when Mr. Thomas saw the common stock being purchased and asked what that was for, he was informed that, “Well, we're purchasing the stock because we expect to convert it into the new preferred which is going to be issued by Tide Water and that we're going to sell it to institutional investors because it's a good investment. Now, Mr. -- these -- 50,000 shares of this common stock of Tide Water was so-purchased within a period of approximately one month. Subsequently, the directors and the stockholders of Tide Water did approve a resolution granting the right to issue the preferred stock and permitting the conversion of the common to the preferred stock. Now, after the resolution was passed, Lehman Brothers converted its preferred -- it's prominence preferred and immediately, within less than six months, a matter of fact, within approximately two months, sold the preferred stock to investor, realizing, as the trial court found a short-swing profit of approximately $98,000. The Court -- the trial court held that since the statute, Section 16 (b), does not state that a partner must -- or, rather, a partnership must return profit, the trial court decided to go by the literal language of the statute. The statute said, “A director, an officer, or a 10% stockholder” and the trial court said, “Well, Lehman Brothers is not a director, it is not an officer, and it is not a 10% stockholder, therefore, no liability, as far as they're concerned. With respect to Thomas, who is a director, well, he has a certain percentage of interest in the partnership. We'll only award judgment against him for his proportionate share of his partnership interest. Now, on the course of examination, on the course of the trial, it came out from the mouth of Mr. Thomas that he had waived his right. After the first purchases of common stock had been made, he had orally told his partners at a luncheon, “I don't want to have any part of this transaction. I don't want any profit. I don't want any loss.” Further, it was shown that -- on other occasions, other partners of Lehman Brothers have similarly waived their rights to transactions or to profits from short-swing transactions in corporations of which they were directors. And, the testimony showed that during every time which these profits were waived, the other partners of course received more than their proportionate share in order to make up the difference, so that at no time did any of the partners actually suffer any financial loss by reason of their having waived their rights to such profits.
John M. Harlan II: I don't understand that. You say that they got some extra volume from their partnerships as the substitute for what would have been their interest in the short-swing profit?
Morris J. Levy: No, what I said was, Your Honor, that every time that one partner waived his right to receive his share of the profits, his share of the profits was distributed amongst the other partners. So, instead of one partner getting, say, 8%, he'd get 8.2%. And in this way, it was a round-robin where one partner would give up his profits and would not actually be paid that. He would make it up from another transaction where another partner similarly waived his rights thereto. Now --
Felix Frankfurter: From the point that he made it up, is that your point? Suppose there hadn't been any made up, just in this Tide Water transaction, and Mr. Thomas forewent his share in the partnership -- in the distributed shares of the partnership. He said, “In lieu of my relation to Tide Water, I'm not going to take a penny of profit out of that which has come to the firm out of Tide Water's dealing.” Therefore, there'd be more in the pool left to be distributed among those partners who are in Tide Water oil case. Is that right?
Morris J. Levy: That's right.
Felix Frankfurter: Alright.
Morris J. Levy: But, I say to Your Honor that even if there were no other transactions, assuming that there was no testimony that there had been any other waivers by other partners of profits made by the firm and corporations in which they were directors, that that still would not excuse the return or the recovery from Lehman Brothers in this particular Tide Water transaction because you cannot disassociate a partner from his partnership. You cannot disassociate what information a partner gives to his partnership. As a matter of fact, under the partnership law, a partnership must divulge any information concerning the partnership business to his partners. And, Thomas, naturally, would be under a duty to divulge such information to his other partners.
Felix Frankfurter: I don't follow that. I had in my mind the recent experience of one of the most pristine investment office in England, one of the partners of which was a member of the governors of the Bank of England. He was under obligations to make no revelation to -- to his other partners. In this country, was that against the law?
Morris J. Levy: Well, under the--
Felix Frankfurter: I don't know. I'm asking you.
Morris J. Levy: Under the New York Partnership Act, Your Honor, each partner must divulge information involving the partnership business. It cannot withhold such information with the other partners.
Felix Frankfurter: In the situation I put to you, in that troublesome case in England, it couldn't happen here.
Morris J. Levy: Apparently, it couldn't happen in New York or it shouldn't happen in New York.
Felix Frankfurter: Is that a specific provision in the New York Partnership Law?
Morris J. Levy: Yes, sir.
Felix Frankfurter: Do you mind reading it?
Morris J. Levy: Well, apparently, Your Honor, at this moment, all I can find is Section 23 of the Partnership Act which provides partnership charged with knowledge or notice to partner and it can be imputed and implied that if a partner knows something, then the other partners must know that, too.
Felix Frankfurter: That means the director of a company who is a partner in a firm must tell all his fellow directors, his fellow partners, business of the firm of which he is a director. Is that what you --
Morris J. Levy: As long as you--
Felix Frankfurter: -- saying?
Morris J. Levy: No, I don't say that. I say if it reflects upon the business of the partnership, if it involves the business of the partnership.
Felix Frankfurter: Although he's under -- the statutory duty is not to make that disclosure, not to give off confidential information in his director's role, is that it?
Morris J. Levy: Well, the question is, how can -- it's actually between two firms. Whether he has to disclose information to his partnership of anything that involves partnership business and, if he's under a duty not to disclose, because he's a director, confidential information, then the question is what should he do? But I don't think we're confronted with this problem at the present time.
Felix Frankfurter: Well, I think that makes some differences. There's a statutory duty of one partner to tell all the inside information--
Morris J. Levy: Well, here's--
Felix Frankfurter: -- of the corporation of which he's a director. That may have a bearing on this case.
Morris J. Levy: Well, Section 42 of the Partnership Act provides duty of partners to render information. Partners shall render on demand true and full information of all things --
Felix Frankfurter: Well, that's already on demand. That's already a qualification.
Morris J. Levy: On all -- of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability.
Felix Frankfurter: You don't have to interpret that New York statute in this case in its fullness.
Morris J. Levy: Now, getting back to the case of -- at hand, Your Honors, Judge Medina, who wrote the majority opinion for the court below, recognized that the purpose of the statute would provide -- would desire that the partnership be held responsible for all the short-swing profits realized by it because the director is -- the director of the corporation is also a member of the partnership and he stated there is only one way to prevent stock manipulations by insiders to whom confidential information is available and that is to squeeze every possible penny of profit out of such transactions. This has been held to be the clear purpose of Section 16 (b), a broadly remedial statute. One way to do this was to construe Section 16 (b) to include the partnership because of the unity of the partnership relationship and the fact that one of the partners is a director. He decided not to follow this because of a case previously decided by the same court in Rattner against Lehman. Now in that case, the plaintiff came to court, asked for judgment against the partnership upon the bare legal assertion. Here, you have a partnership that realized profits from its short-swing transactions. The director -- a partner is a director of the firm. Therefore, the partnership is responsible. There was no proof of any information being given to any of the partners concerning the prospects that -- the business affairs of the corporation. Now, in this particular case, there's an -- the undisputable proof that Mr. Thomas and Mr. Hertz discussed the matters of Tide Water with their partners, that the Lehman Brothers advised Tide Water with respect to its financial operations, and of necessity, had to have knowledge of its business affairs was in it of itself in a fiduciary relationship to Tide Water because of that. Similarly, as if an attorney who represented a corporation had to be informed about serving information would be a fiduciary. From an addition to being such fiduciary, there was -- the partner who was the director on the Board and the statute says that any short-swing profits realized by such person must be recoverable or may be recoverable from him.
Felix Frankfurter: Mr. Levy, can you tell without arguing it, just unequivocally, can you tell whether New York has the entity theory of a partnership?
Morris J. Levy: Had the entity theory?
Felix Frankfurter: Yes. Is the New York law based on an entity conception of a partnership?
Morris J. Levy: Offhand, Your Honor--
Felix Frankfurter: I just want to know, is it capable of being to say yer or no?
Morris J. Levy: Offhand, Your Honor, I wouldn't know. I couldn't give you an answer. I wonder, Your Honor, if I may reserve the rest of my time for rebuttal on this. I think you have enough of my argument. I'd like some -- the additional time for my rebuttal.
Earl Warren: You may do that.
Morris J. Levy: Thank you, sir.
Earl Warren: Mr. Seymour.
Whitney North Seymour: Do I precede the Government on this, Your Honor? The Government is here as amicus curiae.
Earl Warren: Oh, whichever order -- whichever order you have --
Whitney North Seymour: I rather assume the --
Earl Warren: -- agreed before.
Whitney North Seymour: -- Government would go next.
Earl Warren: Very well. Mr. Conwill, will you proceed first, yes?
Allan F. Conwill: Thank you. Mr. Chief Justice and may it please the Court. I would, first of all, like to clarify a view of the Securities and Exchange Commission concerning Mr. Justice Frankfurter's question to counsel for the petitioner on the duty of a partner to disclose information concerning the corporation of which he is a director to his partnership. I think Section 42 of the New York Partnership Law may very well be read to indicate a duty on the part of a partner to disclose his partnership or disclose to his partnership confidential information. But we, at the Commission, very strongly feel that Section 16 (b) of the Exchange Act provides a paramount duty and that paramount duty in the Federal Act overrides any duty that he might have to disclose under Section 42 of the New York State Partnership Act.
Potter Stewart: What 16 (b) have -- or the Exchange Act have to say about disclosure or nondisclosure, nothing, does it?
Allan F. Conwill: It has nothing to say and disclosure or nondisclosure is irrelevant, sir. Now to us, at the Securities and Exchange Commission, there are only four basic facts with which this Court need to concern itself in order to render a decision in favor of the position we urge. In this connection, perhaps we take a slightly different view than counsel for the petitioner but to us, the only four vital facts are, first of all, that Joseph Thomas was a partner in Lehman Brothers. Second, that he was a director of Tide Water. Third, that Lehman Brothers bought and sold Tide Water equity securities within a period of six months. And fourth, that Lehman Brothers realized a profit. All of these facts are admitted and it is our contention that these four basic facts must establish liability under Section 16 (b).
Potter Stewart: Liability on whose part?
Allan F. Conwill: Liability, we contend, on the part of Lehman Brothers, the partnership for the full amount of profits which were realized. Liability also on the part of Joseph Thomas for the full amount of profits realized.
Potter Stewart: What if, instead of telling Lehman Brothers -- what if instead of Lehman Brothers, his partners purchased and sold these securities, what if his brother had, who was not his partner? And let's assume, if you think it's relevant at all, that he had given his brother a lot of inside information.
Allan F. Conwill: I don't think it's relevant at all that he gave his brother inside information.
Potter Stewart: The statute makes that entirely irrelevant, doesn't it?
Allan F. Conwill: It does. That would pose a difficult question for us at the Commission because we feel that Section 16 (b) should be interpreted in light of whether or not the relationship or the transaction gives rise to the danger or the potentiality of the use --
Potter Stewart: Well, I suppose more people have brothers --
Allan F. Conwill: -- of inside information.
Potter Stewart: -- than have partners, don't they?
Allan F. Conwill: I beg your pardon, sir?
Potter Stewart: I suppose there are more people with brothers than there are people with partners, aren't there?
Allan F. Conwill: I'm sure that's correct.
Potter Stewart: So, probably, the danger is greater telling your brother than it is of telling your partner. It would happen more often.
Allan F. Conwill: Possibly, sir, although I would say that the relationship of partners is of a type of intimacy that sometimes you do not always find in brothers.
Potter Stewart: Well, instead of a brother, let's take a wife. What if he told his wife?
Allan F. Conwill: Again--
Potter Stewart: And his wife had made -- had bought -- had been in a position to buy $50 million-worth of securities and turn a short-swing profit of $100,000.
Allan F. Conwill: In the situation of the wife, the partner certainly has, I would say, in the normal case of beneficial interest, and what the wife does, any profit she realizes in the ordinary marriage, I would say, would go down to his benefit. And, again, the danger of the transmission and the use of inside information is there.
Potter Stewart: What I was really getting at, Mr. Conwill, was only this. You stated these four conceded uncontested facts and acted as though that was kind of a QED under this statute and I just was wondering if it was a QED.
Allan F. Conwill: It is in this case because, here, of course we are considering the partnership. I might say that we can do apply a test in 16 (b) cases similar to a test applied by a distinguished jury as happened in the Sixth Circuit in Fredo against Newman, that is, you look at the transaction and the relationship and determine from that whether or not there is a danger of the use of inside information.
Potter Stewart: Now, is that particular case has got quite a different issue.
Allan F. Conwill: It's quite a different issue, I agree, but the basic reasoning to us is relevant.
Felix Frankfurter: Well, it can't -- they can't be quite as loose that you've just put it because the danger in the hypothesis given by Justice Stewart, if it's merely a question of danger, then you could be with the brother and the wife situation.
Allan F. Conwill: I agree--
Felix Frankfurter: If you look at the specific -- if that's the test.
Allan F. Conwill: I agree that, to use that test and that test alone --
Felix Frankfurter: And what do you --
Allan F. Conwill: -- would not be sufficient. We need something more.
Felix Frankfurter: What did you have before?
Allan F. Conwill: In this case, Mr. Justice Frankfurter, we do have something more. We have the relationship of the director and the partner. The partner was a director. The Partnership Act was his Act under conventional and under New York Partnership Law. So, we tie it in --
Felix Frankfurter: Well, we do have to go back and consider -- if I refer -- if I'm tied with the implication of the remark you just made -- do we have to go back to conceptions of the partnership's relation and to see the general condition of a partnership?
Allan F. Conwill: Yes, sir. What I was --
William O. Douglas: Partnership under the Act is a -- is it a person? I forget the definition.
Allan F. Conwill: Yes, sir. Under Section 3 (a) (9) of the Exchange Act, “person” includes “a partnership.” Therefore, we would say that when Section 16 (a) starts off, “Every person who is a beneficial owner, director, or officer, that the person --”
John M. Harlan II: 10% beneficial owner?
Allan F. Conwill: Yes, sir. That “person” since it includes partnership, can properly include the partnership as a director in this situation and, indeed, where the danger is so clearly present or the potential use -- the potential unfair advantage to be gained by unfair use of information is there, we believe that Section 16 (b) must be so construed.
Felix Frankfurter: Where is the word “person” in 16 (b)?
Allan F. Conwill: It is not in Section 16 (b).
Felix Frankfurter: But, how does that definition help you?
Allan F. Conwill: The definition helps us in this way, Mr. Justice Frankfurter. Section 16 (b), in referring to beneficial owner, director, and officer, refers back to the reporting requirements of these categories in Section 16 (a). Section 16 (a) leads up, “Every person who is a director.”
Felix Frankfurter: Well, then is the partnership a director?
Allan F. Conwill: We take that position that for purposes of --
Felix Frankfurter: You mean that Lehman Brothers was a partnership of this concern, of this corporation?
Allan F. Conwill: We take that position, sir, in this case. We feel that--
Felix Frankfurter: Is that vital to your case?
Allan F. Conwill: Yes, sir. It is vital to the case. We feel that, in order to effectuate the statutory purpose of Section 16 (b), that it is necessary to consider Lehman Brothers as equivalent to a partner of Tide Water Associated Oil Company.
Felix Frankfurter: Well, I don't want to make a fine point of it, but you have to say it is a part -- that it is a director, not equal to, but a director.
Allan F. Conwill: That is correct. We're not saying really “equal to,” we're saying that, for purposes of Section 16 (b), we're urging the Court to consider Lehman Brothers as a director.
Charles E. Whittaker: May I ask you please, did I correctly understand you to say, in answer to Mr. Justice Frankfurter, that you consider it vital to your case that we consider director to include partnership as the form of word is used in 16 (b)?
Allan F. Conwill: Well, that is the legal rationale by which we arrive at the result which we urge, Mr. Justice Whittaker.
Charles E. Whittaker: Well, suppose that a partner actually, beneficially interested, had such equity securities taking the names of other people. It'd still be his transaction (Inaudible)?
Allan F. Conwill: Are you referring now to the partner who is a director?
Charles E. Whittaker: Yes.
Allan F. Conwill: Yes, it would be the partner's transaction.
Charles E. Whittaker: Alright. Now, suppose he had a piece of it and somebody else had a balance, would it be different?
Allan F. Conwill: No, sir. It seems to me that --
Charles E. Whittaker: And that would all be directors?
Allan F. Conwill: I believe, in that situation, that they would all be directors because they form what is, in effect, a pool or perhaps a joint venture for this particular purpose. It's something like a partnership in this situation and I believe that if a director engages in that form of endeavor, then the people who join with him in it, because of the danger of the use of inside information, should likewise be held liable under Section 16 (b). This danger, I cannot overemphasize --
William J. Brennan, Jr.: May I just ask one other question?
Allan F. Conwill: Yes, sir.
William J. Brennan, Jr.: Does that lead us thus far? Suppose Mr. Thomas had been killed over a period -- over the period when all these transactions occurred. In consequence, he was not able to give any attention either to his duties as director or as partner, yet resigned from neither position, would you be taking any different position for that?
Allan F. Conwill: No, we would not, because under the admittedly arbitrary test, the arbitrary rule of thumb is 16 (b), that would be irrelevant. I wonder if I may dwell, for a few moments, upon the reality of this danger because, to us, he reality of the danger is brought into very sharp focus by the very facts of this case and its predecessor, Rattner against Lehman. And I believe counsel for petitioner told you that, in Rattner against Lehman, a partner of Lehman Brothers was held liable only for his pro rata share of the profits of a short-swing transaction and securities of the corporation at which he was a director.
Potter Stewart: That case was decided about 10 years ago.
Allan F. Conwill: 1952 at January, I believe. Now, the testimony in this case shows that when Joseph Thomas, the Director of Tide Water, learned of the Lehman Brothers' purchase of Tide Water equity securities, he went to his partner, Robert Lehman, and asked him the purpose of the transaction. And upon being told the purpose, Thomas apparently stated that it might prove embarrassing for him because of his Tide Water directorate. The response of Robert Lehman is very interesting and quite significant. He said, “Well, you,” meaning Thomas, “had better do something about it.” Robert Lehman didn't suggest that Lehman Brothers should do anything about it and indeed, why should he, because he had Rattner against Lehman as a precedent before him only approximately three years before. And, under Rattner against Lehman, while John Hertz, his partner, was forced to give up a small amount, his pro rata share of the profits in the consolidated Vultee Aircraft transaction which was the subject of that decision, Robert Lehman made money and as did every other partner of Lehman Brothers, including Joseph Thomas. Now, he has the Tide Water transaction before him and, this time, it's Joseph Thomas' turn to lose a little money. But, Robert Lehman makes money, as do all of the other partners of Lehman Brothers, including John Hertz, who more than recoup what he made out of his losses in the consolidated Vultee transaction which gave rise to Rattner against Lehman. Now, when does this cycle end? Who is to say it will ever end? If this Court --
Potter Stewart: Don't you think -- to answer your question, don't you think it's for Congress to say? Rattner has been on the books for 10 years. The SEC makes periodic reports to Congress, tells them all about the Rattner case. Don't you think it's for Congress to say when this is -- when the law is going to be changed?
Allan F. Conwill: In the first place, sir, Rattner against Lehman was a decision of the Second Circuit.
Potter Stewart: That's correct.
Allan F. Conwill: We, at the SEC, do not feel compelled to run to Congress every time we get an adverse result in the Circuit Court.
Potter Stewart: Well, hasn't -- haven't -- hasn't about 90% or more of this litigation under this statute in the Second Circuit?
Allan F. Conwill: A large amount of it has (Voice Overlap) --
Potter Stewart: All the precedence I could find were Second Circuit precedence.
Allan F. Conwill: Certainly, a large amount of it has, but we felt it was proper --
Potter Stewart: This--
Allan F. Conwill: Since this was only one circuit, to wait and see when it would happen again. Now, as to our reporting to Congress, we did report the results of Rattner against Lehman in our annual report in 1952, at which time it was still on appeal and we simply reported it -- or, rather, 1951. In our annual report for 1952, which run some-253 pages, we devoted 8 lines to explaining simply the result of Rattner against Lehman, which is what we normally do. All the divisions in the Commission make a report to Congress which is included here. In the case of the General Counsel's Office, which is responsible for litigation, they simply result -- report the results of that litigation. They do not go ahead and make recommendations and indeed, on the basis of a single Circuit Court opinion here, it would have been highly unusual if we had.
Felix Frankfurter: Not if the evil is of greater (Inaudible) and here it is. That's the whole point of having an adverse decision by a court in which this kind of litigation dissented, reaching such a disastrous result and not asking for remedies, and I think it foregoes this case. All I'm saying is you -- your suggestion that you don't run to Congress every time you have an adverse decision, I commend you for doing that, but not if the evil is as portentous as you tell us.
Allan F. Conwill: We believe the evil is every bit as portentous as I have told you, Mr. Justice Frankfurter. I will say this. In Rattner against Lehman, our hands were tied. We were appearing amicus in that case and we could not bring it up to the Supreme Court. We could not petition that for cert as an amicus. Now, it only took three years for this situation to develop again with the very same defendant.
Felix Frankfurter: But it developed at the time--
Allan F. Conwill: And we have --
Felix Frankfurter: The point is it developed at the time, and presumably it's a safe rule of life that people would go on doing the same thing. That's the general principle which I have been curious to verify.
Allan F. Conwill: I believe sir that it is not safe to assume that the danger is minimal if this Court upholds Blau against Lehman because if this Court upholds Blau against Lehman, you are going to, in effect, give license to the investment bankers and any other kind of a partnership to engage in this type of transaction.
Felix Frankfurter: And you, again, are going to rest that it's not your business to run to Congress every time you get an adversed opinion.
Allan F. Conwill: I believe we might well regard the decision of this Court as something more significant than an opinion of a single Circuit, sir.
Felix Frankfurter: Merely, the Second Circuit by the judge's dissent in that case.
Allan F. Conwill: I repeat, I believe, we may well take a different attitude. But, back to the danger again because that is important, it is there, we got Robert Lehman making money in two transactions and there's no indication of where this might stop. He can have successive transactions or his partnership can. Now, it may well be, speaking hypothetically, that they will continue and we say that it may well be something more than hypothetical if this Court upholds the Second Circuit in this case. But, if they do, there can be a succession of transactions. Maybe in one of them, in some future date, Robert Lehman will lose money if Lehman Brothers trades in an equity security of a corporation of which he is a director. But, that won't matter to him because it will be insignificant in comparison with the bundle of money that he has made in prior transaction and insignificant in comparison with the bundle which he can make in future transactions. We say that the type of result which the Second Circuit decision will encourage is very little different than the pooling arrangements which were so roundly condemned by the Senate report which preceded the Securities Exchange Act. In these pooling arrangements, investment bankers and insiders were often involved and we believe that the Senate report accurately characterized these pooling arrangements as vicious, as predatory, and as flagrant violations of fiduciary duties. It is true, as respondent's brief asserts, that the when Section 16 (b), or what ultimately became Section 16 (b), was first introduced into Congress, it contained a provision, first, which barred any insider from disclosing confidential information and, second, impose short-swing liability on any person -- any person to whom that disclosure was made. Now, this provision was sweeping in character, and plainly, it could have embraced partners or directors. But, it was so sweeping that it could have embraced friends, relatives, barbers, bartenders, bootblacks, or anyone else that you would care to name. And, the reason it was deleted is because it would have required proof of disclosure and that proof of disclosure made it, as the respondent's brief concedes, a dubious administrative practicality. Now, the respondent argues from that that its elimination means that, obviously, Congress intended to exclude from the operation of Section 16 (b) partners of directors, but I would suggest to this Court that the elimination of a broad provision because of administrative difficulties of enforcement actually reflects a Congressional intent to construe what remains in Section 16 (b) broadly. And, I suggest to the Court that this conclusion finds ample support in the history of judicial interpretation of Section 16 (b). In fact, you have filed with you in this case a brief amicus from the American Society of Corporate Secretaries and I believe a reading of that brief and the cases they cite will clearly indicate that the cases which give them so much pain prove our point, namely, that never -- nearly every court which has had an opportunity to consider Section 16 (b) as recognized that it is necessary to construe it broadly in order not to frustrate its plain statutory purpose. I might add that, while we are obviously urging a broad construction on you today suggesting that you find that Lehman Brothers is a partner within the meaning of Section 16 (b), that we don't regard this as an extraordinarily novel or startling interpretation.
William J. Brennan, Jr.: You said is a “partner,” is a “director.”
William O. Douglas: Meaning “director”?
Allan F. Conwill: Is a director, I beg your pardon. We think this type of reasoning find support in other cases, notably, those consistently rendered under Section 249 of the Bankruptcy Act. I'm sure the Court recalls that under Section 249, no compensation shall be allowed to any committee or attorney or their person acting at a bankruptcy or reorganization proceedings in a fiduciary capacity who buys or sells stock of or claims against the debtor. Now, the statutory purpose behind Section 249 is comparable to that of Section 16 (b). The Congress recognized that active participants, in say, a Chapter 10 reorganization proceeding were in a position to have access to information not generally available to the public. And in order to bar the use of that inside information, they enacted a arbitrary standard, a rule of thumb, if you will, similar to that in Section 16 (b) saying, “If you buy or sell, you can receive no allowance.” Again, under 249, as in Section 16 (b), good faith is irrelevant. Lack of use of inside information is no defense and the cases have interpreted this, at least as broadly as we are asking you to interpret Section 16 (b).
Felix Frankfurter: But you had a generalized catch-all phrase or other fiduciary relationship.
Allan F. Conwill: Or other fiduciary capacity --
Felix Frankfurter: That --
Allan F. Conwill: -- which means anyone who has entered an appearance --
Felix Frankfurter: Have you got any --
Allan F. Conwill: -- in the proceeding.
Felix Frankfurter: -- any such catch-all phrase in 16 (b)?
Allan F. Conwill: No, sir, although I don't regard that as exactly a catch-all capacity.
Felix Frankfurter: Well, on any other --
Allan F. Conwill: It refers to --
Felix Frankfurter: -- fiduciary capacity meaning we have to construe what a fiduciary capacity is and that isn't easily fit into (Inaudible), is it?
Allan F. Conwill: Other fiduciary -- well, fiduciary capacity means, we believe, a participant in the proceeding who is neither an attorney nor a member of the committee.
Felix Frankfurter: Now, what comparable phrase is there in 16 (b)?
Allan F. Conwill: We don't have one precisely comparable, sir.
William O. Douglas: Except the word “such” that carries you back to 16 (a)?
Allan F. Conwill: That's right.
Earl Warren: We'll recess now, Mr. Conwill.
Allan F. Conwill: Thank you.


Earl Warren: Number 657, James Brookhart, Petitioner, versus Martin A. Janis, Director of the Ohio Department of Mental Hygiene and Correction. Mr. Messerman.
Gerald A. Messerman: Mr. Chief Justice, may it please the Court. Petitioner stands convicted upon three counts of forgery, three counts of uttering forged documents, one count of breaking and entering an uninhabited dwelling in the night season, and one count of grand larceny. He filed a petition for writ of habeas corpus in the Ohio Supreme Court pursuant to a provision which allows the Ohio Supreme Court to exercise original jurisdiction in such actions attacking the conviction upon the basis of which he was incarcerated. His petition for writ of habeas corpus was denied. This case is before this Court on review on petition for writ of certiorari. Petitioner was tried and convicted in a trial in which he was denied the right to cross-examine the witnesses who appeared against him. He was denied the right to confront certain of the witnesses who appeared against him by statement alone. He was denied the right to have adequate notice of the charges upon which he was ultimately convicted. He was charged by indictment upon -- with certain offenses. He was tried upon entirely different offenses. Petitioner contends that in these circumstances he was denied the right to confront and cross-examine the witnesses against him in violation of the Sixth and Fourteenth Amendments. He was denied the right to contest the state's case by any means whatsoever in violation of the Fourteenth Amendment. He was denied the right to adequate notice of the charges upon which he was ultimately convicted in violation of the Fourteenth and the Sixth Amendments. The circumstances which give rise to these claims are contained in a record not of very great length. I would invite the Court's attention to pages 20 and 21 of the record. A colloquy occurs upon those pages which gives rise to the controversy presently before this Court. In that colloquy, defense counsel, appointed counsel, first brought to the attention of the trial court that the case was before the Court on a prima facie case. I might state at this point that there was no such thing formerly known under the law of Ohio as a prima facie case, at least in the circumstances of a criminal trial. So, this is not a term which had a clearly defined meaning at the time the statement was made. The Court however, attempts to articulate or express what a prima facie case is, and the Court states, “There's going to be no cross-examination of the witnesses so the Court will know and the state can't be taken by surprise. The Court doesn't want to be fooled and have your client change his mind halfway through the trial and really contest it.” The state has a contest we want to know in fairness to them so they can put on complete proof. At that point, defense counsel attempted to reserve the right of cross-examination. The Court, however, advised him that if the case were tried as a prima facie case, he would not be permitted to cross-examine at all. And then added, ordinarily on a prima facie case, the prima facie case is where the defendant not technically or legally in effect, admits his guilt and wants the state to prove it.
Potter Stewart: Mr. Messerman, you said that in your studies preparing for this argument you found those such anomalous as anywhere in Ohio and that confirms my recollection, but did you learn that in this county or in some counties this is a -- this is the usual way of proceeding in a criminal case, did you --
Gerald A. Messerman: I did not learn that, Mr. Justice Stewart, until the state's brief was filed in this case and I was unadvised by the state that this is a common practice in certain circumstances. If it is a common practice, it is a practice of which I am totally unfamiliar and furthermore, it is a practice with which the Ohio Supreme Court was apparently unfamiliar because the Ohio Supreme Court groping for some means to justify the very unusual procedure which occurred in this case held that this was comparable to a no contest plea despite the fact that there is no such thing as the no contest plea --
Potter Stewart: We don't have that either (Voice Overlap) --
Gerald A. Messerman: -- in the State of Ohio in felony cases. And the Court -- the Ohio Supreme Court recognize this as a rather unusual procedure but said despite the fact that it was an unusual procedure, there was no reason for not accepting it if it in fact, corresponded or protected all of the defendant's rights. Of course, we submit that it didn't.
Potter Stewart: In this colloquy, the -- there's an implication that this judge in this county, this was all -- it's up to him. Did he define what a prima facie proceeding was?
Gerald A. Messerman: No, Your Honor. There is certainly much confusion left with respect to what a prima facie case (Inaudible) -- case is. We do know that in the mind of the Court, it meant no cross-examination. We do know that in the mind of the Court, it meant no contest by any means whatsoever. We do know in the mind of the Court that it was not a trial on the merits. On page 23, the Court, when Mr. Ergazos, who was defense counsel, asserted his first objection to evidence which the state attempted to introduce, Mr. Ergazos objected, the Court said, “Are you trying the case on the merits or just want the state to make a prima facie case?” So, apparently, it is not a trial on the merits. Now, we do not know whether a prima facie case requires the state to establish proof -- guilt by proof beyond a reasonable doubt. The record strongly indicates that it does not that there must merely be some evidence or perhaps substantial evidence, but whether it was required to establish guilt by proof beyond a reasonable doubt is a matter left in very substantial doubt. We don't know what a prima facie case is. The petitioner apparently had some notion though of what was going on and, when he saw what was going on, he brought his objection to the attention of the Court. And, the time at which he made that objection, the sequence in which the objection occurs is of substantial importance in this case because, I would submit to the Court that the state is able to make even a pretense of justifying the fairness of what occurred in this case only by ignoring an important part of the record. The Court stated, the Court knowing that and the prosecutor knowing that instead of having a half-dozen witnesses on one point, they only have one because they were -- well, they understand there will be no contest. Now, it is at this point that the defendant for the first time says, “I would like to point out in no way am I pleading guilty to this charge.”
Potter Stewart: Where is this?
Gerald A. Messerman: This is on page 22 of the record. Now, the state ignores the intervening paragraph and suggests that the defendant was asserting this protest solely to the Court's statement which appears on the bottom of page 21, the Court statement being a prima facie case is one in which the defendant, not technically or legally in effect admits his guilt and wants the state to prove it. That isn't specifically what he was objecting to although one might assume that he was objecting to that as well. But he was objecting to the proposition that there was going to be no contest in this case. And the Court said, “If you want to stand trial, we will give you a jury trial.” Now, as petitioner contends and as the state acknowledges, in the State of Ohio the defendant has an absolute right to waive jury trial. It is not a matter of discretion with the Court to determine whether or not he should be permitted to waive his right to a jury trial. He did waive his right to jury trial here and he could demand a trial by the Court (Voice Overlap) --
William J. Brennan, Jr.: But Mr. Messerman, you say that trial counsel was assigned counsel?
Gerald A. Messerman: Yes, Your Honor.
William J. Brennan, Jr.: Well, at page 22, he seems to know what this is all about. “Prima facie Your Honor is all we're interested in.” Now, what's the significance of that, notwithstanding the petitioner's objections?
Gerald A. Messerman: Your Honor, trial counsel did acquiesce to a prima facie case. He did not demonstrate that he knew what was all -- what it was all about. He quite clearly did not demonstrate that because he attempted to reserve, for example, the right to cross-examine witnesses. He thought by entering this plea whatever it was, he could reserve that right should anything new be brought out. But the Court advised him that he could not reserve that right. In addition, he apparently thought that he could assert objection to evidence which he considered inadmissible but the trial court apparently thought that he had waived that right also by agreeing to have a prima facie case tried by the Court. I submit to the Court that no one could know what a prima facie case was precisely in the circumstances of this case or any other case. The --
William J. Brennan, Jr.: Are you then suggesting that whatever assigned counsel did, he did nothing which could be imputed to the petitioner as a waiver, is that it?
Gerald A. Messerman: He did nothing which could be imputed to petitioner as a waiver for two reasons, Mr. Justice Brennan. And the first reason is that it is quite obvious from the record that he didn't know what he was waiving and at the very least, in order to find waiver or in order to impute waiver by counsel to one's client, the record should contain some indication that the waiver by the attorney was made intelligently. This record contains no such indication. The contrary demonstrates that it was not made intelligently. And, secondly, even assuming that it had been made intelligently, even assuming that the attorney didn't know what a prima facie case was, the defendant here specifically objected to the proceeding which was about to ensue. An uncontested proceeding in which the state was apparently relieved of the obligation of establishing guilt by traditional standards and of having its case subjected to traditional truth testing devices, an out-and-out waiver.
Potter Stewart: Well, they -- all the defendant said is this one thing?
Gerald A. Messerman: He added immediately below when the Court said, “If you want to stand trial, we will give you a jury trial.” The defendant said, “I have been incarcerated now for the last 18 months in the county jail.” The Court quickly advised him that he would not receive credit for that. The defendant then stated, “For over two months, my nerves have been shut. I couldn't stand it out there any longer. I would like to be tried by this Court.” Now, he first objected to the Court's implication that this would be a no contest case that this plea was in effect, though not technically or legally a plea of guilty and he secondly rejected the Court's offer of a jury trial stating that he wanted to be tried by the Court.
William J. Brennan, Jr.: Yes, but look what follows, “Make up your mind whether you require a prima facie case or a complete trial.” And then this counsel intervenes, “Prima facie Your Honor, it's all we're interested in.” The Court says, “Alright,” and it goes on.
Gerald A. Messerman: Your Honor, I would submit to the Court that that statement should not be deemed a waiver of the fundamental constitutional rights which the petitioner lost by -- apparently by virtue of that statement for several reasons, some of which I have already mentioned. These were the personal rights of the accused that were involved. It doesn't make any difference whether we call them tactical or strategic or what we call them. Every right that the accused has in a criminal proceeding is his right. Now, the needs of the orderly administration of justice required the establishment of certain rules whereby those rights are exercised by counsel. Nonetheless, they remain the personal rights of the accused. It is the accused who went to jail in this case and not his attorney. Since they are the personal rights of the accused where the accused attempts to assert those rights as he did in the circumstances of this case, a statement by his attorney which is quite clearly demonstrated to be made without full knowledge of its consequences should not be deemed a waiver of those critical constitutional rights involved in this case. Now, it is true, the attorney did make the statement, what he intended whether or not the petitioner knew what was intended by that statement or whether anyone knew what was intended by that statement is a matter in very substantial doubt. There is one thing that is perfectly clear upon this record. The defendant was denied the right to cross-examine witnesses and he was denied the right, not only with respect to witnesses who actually appeared in the courtroom, but the -- perhaps a very critical testimony in this case involved the statement of an alleged co-offender, Mr. Ronald Mitchell, and that a statement of that alleged co-offender was introduced over objection, on page 39 of the record. Now, this is a situation where critical testimony is presented against the petitioner not by a witness who appears in Court, who is subject to evaluation for purposes of determining his credibility at least by seeing him if not by cross-examination, assuming that that had been waived, but this is testimony which appears in the case and which is relied upon virtually entirely by the Court in finding the petitioner guilty of at least two of the offenses charged and it is testimony which is submitted to no test for purposes of determining credibility. The petitioner was denied the opportunity to confront this witness face-to-face. He was denied the opportunity to cross-examine this witness. Now, if --
William J. Brennan, Jr.: There was --
Byron R. White: He could've had a jury trial though, I suppose.
Gerald A. Messerman: Yes, Your Honor, he could've.
Byron R. White: And face the -- these witnesses without any question.
Gerald A. Messerman: Yes, he could have. I assume that he certainly could have, and he did raise jury trial.
Byron R. White: But he had his choice, and he had his choice.
Gerald A. Messerman: No, Your Honor. He didn't have his choice between a jury trial and a trial in which he was going to face all of these witnesses. That isn't the choice that was put to him by statute. He has the right to choose between two things.
William J. Brennan, Jr.: But that doesn't raise the constitutional issue for us, does it?
Gerald A. Messerman: Your Honor, I submit that it does. When he chose to be tried by the Court, he had a statutory right to make that choice. Having made that choice, it was necessary for the Court to provide him with a trial in accordance with all constitutional safeguards available to the accused in any criminal case.
Speaker: Unless he waives them.
Gerald A. Messerman: Unless he's waived those. And he doesn't waive those rights Mr. Justice Harlan, by agreeing that he does not want a jury trial. He wants to be tried by the Court. And I certainly know of --
Speaker: His counsel (Inaudible)
Gerald A. Messerman: It can be argued Your Honor and if this Court accepts the proposition that the ambiguous ambivalent statement of counsel in the circumstances of this case made over the direct protest of the petitioner constitutes a waiver, we are out of Court.
William J. Brennan, Jr.: Well, we do have a problem I gather if in the area at least of Henry and Mississippi, and Fay and Noia on this, don't we?
Gerald A. Messerman: We have a problem, Mr. Justice Brennan. That's a -- it certainly is a Henry versus Mississippi and Fay versus Noia type problem and the question presented in both of those cases is whether the federal constitutional claim was waived by conduct which could be considered deliberate, intentional, motivated by technical or strategic--
William J. Brennan, Jr.: But we did recall -- we did hold in Henry, as I remember, that there are some things that counsel does, perhaps there are many things that counsel does, that are binding upon his client in the --
Gerald A. Messerman: Yes, sir.
William J. Brennan, Jr.: -- file of a --
Gerald A. Messerman: I'm aware of the fact that this Court did so decide. My understanding of the decision in Henry versus Mississippi was the case was remanded for the purpose of determining whether or not the waiver in the circumstances of that case was intentionally made for the purpose of bypassing state procedures. There's nothing in this case that suggests that but apart from that, there's a different kind of right, I would submit, involved in Henry versus Mississippi than there is involved in this case. The right involved in Henry versus Mississippi was the right to object to evidence illegally seized in violation of the Fourth Amendment. The right involved in this case is the right to a fair trial, a very fundamental kind of thing. The right to notice of the charges, the right to be able to prepare to meet those charges, the right to confront and cross-examine witnesses, the right to have the question of guilt or innocence determined in a reasonably fair proceeding.
William J. Brennan, Jr.: Well, I recall am I right, didn't Henry decide a Fifth Circuit decision that the election of counsel not to challenge the racial composition of a jury in the circumstances of the state in which the case was being tried was something not binding upon --
Gerald A. Messerman: Yes Your Honor.
William J. Brennan, Jr.: (Voice Overlap)
Gerald A. Messerman: And that --
William J. Brennan, Jr.: Do you think this comes within that sort of situation rather than the other?
Gerald A. Messerman: I think it's something even more fundamental than the case cited which I believe was Whitus versus Balkcom. This is much more fundamental, I submit, than Whitus versus Balkcom. This is the right as already indicated, the right to a fair and rational guilt-determining process.
Hugo L. Black: Isn't it just the right to a trial according to your argument?
Gerald A. Messerman: It certainly is, You Honor. It is the--
Hugo L. Black: Why do you have to use the word “fair”?
Gerald A. Messerman: Alright, I stand corrected.
Hugo L. Black: I understand what you are arguing is that he had a right to be tried, other people were tried. That there was notice, he got tried before a judge or a jury, and he didn't want to be tried by a jury, he go through all of these and have all the rights of a person who is tried for the offense that he's charged with.
Gerald A. Messerman: Yes, Mr. Justice Black, I do stand corrected and at every point in petitioner's brief where the term “trial” is mentioned, it will be found in quotes because petitioner does not agree that this is or was a trial. This was a procedure unlike any that I had -- been seen previously by the Ohio Supreme Court and perhaps unlike any previously seen by this Court, a procedure in which not only did the witnesses appear and testify without being submitted to cross-examination, not only was certain testimony taken by out of court wit -- or from out of court witnesses despite the fact that their statements were under no conceivable rule of law, exceptions to the hearsay rule, thus, calling forth the rule applicable or deemed applicable by this Court in Pointer versus Texas and Douglas versus Alabama. But in addition, after the defendant or the petitioner had committed himself, assuming that he had, assuming that his attorney could commit himself, the state changed the rules of the game. They no longer tried him upon the offenses upon which he was indicted. Instead, the state when it attempted to introduce the check and support of Counts 1 and 2 of the indictment found it necessary to move the -- to amend the indictment by changing both the name -- I'm sorry, the number of the check involved and the amounts involved. It found it necessary to amend the indictment to conform to its proof with respect to Counts 3 and 4 by changing the number of the check upon which those counts were predicated.
William J. Brennan, Jr.: Were those material amendments, do you know?
Gerald A. Messerman: Your Honor, I submit that those are very material amendments. It will not solve the problem raised here to ask whether or not these are matters of form or matters of substance. These are material amendments which affect the ability of the accused to meet the charges against him which affect his ability to obtain notice of the charges upon which he is to be tried and to perform that which he is to perform with that notice, that is prepare for trial. Now, with respect to Counts 5 and 6, if anything, the amendments were far more material, and that, not only the number of the check had to be changed, the amount had to be changed. Then the name of the payee apparently had to be filled in and then the name of the payee had to be changed. Now, it's suggested by the state in the circumstances of this case that these aren't material because the name of the offense remained the same. In other words, according to the state and for that matter according to the Ohio Supreme Court, it is adequate for purposes of apprising the accused of the charges which he must be prepared to meet to simply apprise him of the name of the offense with which he is charged. In the circumstances of this case, he was apprised (Voice Overlap) --
William J. Brennan, Jr.: Incidentally, all that -- all of those amendments were objected to, weren't they?
Gerald A. Messerman: All of those amendments were objected to, Your Honor.
Potter Stewart: That's pretty much the federal system, isn't it? You just charge him with the name of the offense.
Gerald A. Messerman: No, Your Honor. I don't believe that is the federal system.
Potter Stewart: That is subject to -- this motion for a bill of particulars of course.
Gerald A. Messerman: Yes, subject to a motion for a bill of particulars and subject to certain exceptions that might be applicable to particular offenses.
Potter Stewart: Yes.
Gerald A. Messerman: And indeed, had the accused in this case -- had petitioner simply been charged from the general statutory language, the statutes which -- with which he was charged of having violated, he could have move for a bill of particulars and would have been entitled to a bill of particulars as a matter of right but he had no reason to move for a bill of particulars. The indictment did spell out the specifics of the offenses upon -- with which he was charged. Then the specifics changed. So he was advised that he was to be tried upon particular offenses and when the time for trial came, he was tried upon entirely different offenses. So even if we assume the truth of the correctness of the Ohio Supreme Court's observation that it is adequate for purposes of providing notice, though this Court has suggested at least in federal cases that it is necessary to descend to particulars, assuming that its not necessary to descend for -- to particulars in an indictment in a state criminal proceeding. This indictment did descend to particulars. This indictment did charge this man with specific offenses. This man did come to trial presumably prepared to defend against those offenses but this man was not tried.
William J. Brennan, Jr.: Are James Cox and James Brookhart different people?
Gerald A. Messerman: Yes, Your Honor.
William J. Brennan, Jr.: (Inaudible)
Gerald A. Messerman: James Cox or Jimmy Cox --
William J. Brennan, Jr.: Yes.
Gerald A. Messerman: -- is presumably the name of a person who lived in Georgia, from whom someone had obtained a driver's license and other means of identification.
William J. Brennan, Jr.: And James Brookhart was somebody else?
Gerald A. Messerman: James Brookhart was somebody else.
William J. Brennan, Jr.: And what it -- what the judge did was to delete Cox's name and sets to Brookhart.
Gerald A. Messerman: That's right. With do --
William J. Brennan, Jr.: (Voice Overlap)
Gerald A. Messerman: With respect to Counts 5 and 6 of the indictment, the name of the payee was changed from Jimmy Cox to James Brookhart.
William O. Douglas: Can you amend that at any time or not?
Gerald A. Messerman: You can pursuant to a statute amend an indictment at any time during trial pursue -- provided that the name and identity of the offenses or of the offense charged is not changed and provided that in certain circumstances, it does not prejudice the accused. The Ohio Supreme Court in interpreting that statute in a context of this case has suggested that the identity wasn't changed because the name remained the same. The name of the original offenses charged was forgery. The name of the offenses upon which the petitioner was ultimately tried was forgery. Since the name didn't change, the amendment in this case was in full compliance with the applicable statute and therefore proper. Now, petitioner submits that, assuming that that is an accurate interpretation of course, this Court is not going to interpret the Ohio statutes and the Ohio statute is unconstitutional, if not, as written certainly as applied.
Potter Stewart: This is your notice point, is it?
Gerald A. Messerman: Yes, Your Honor.
Speaker: Was there any motion for a trial, a conviction to overrule (Inaudible)
Gerald A. Messerman: No, there was no motion for continuance and the state suggests that, for that reason, the right to adequate notice of the charges upon which the petitioner was tried was weighed. I submit that no waiver should be found in those circumstances for at least two reasons. One is, the state itself, having had ample opportunity to study the question of how this kind of question can be raised, suggest that the waiver raised by a motion to quash the indictment. That's just wrong. A motion to quash the indictment lies only for errors or defects which appear upon the face of the indictment and there was no defect upon the face of the indictment. So, the state, through very learned counsel after ample opportunity to examine the law of the State of Ohio didn't know how this kind of question was to be raised more specifically and suggest the way that is wrong. Secondly, assuming that a continuance could have been requested and it could have been requested pursuant to statute. It was entirely proper for counsel in this case not to request a continuance because a continuance would not have cured the failure to provide adequate notice which had already transpired. This defendant was indicted in March of 1962 -- March 3rd of 1962 -- I'm sorry, of 1961. He was brought for trial on January 29, 1962. Between that period of time, he was either in Tallahassee, Florida in a federal penitentiary or he was in Springfield, Missouri in a mental hospital. He was charged with those offenses in March of 1961. By a statute in Ohio, it was necessary to serve a copy of the indictment on him in March of 1961. He had every right to rely upon the notion that he was to face trial upon those charges. His trial upon those charges was delayed for a period of one year. There is nothing to suggest that he could have prepared to meet the new offenses charged at the time of trial simply by requesting a continuance as in a case recently decided by this Court. Particularly in the circumstances of this case where the mental condition of the accused might have been relevant, the failure to provide adequate notice at a time when it would have permitted petitioner to prepare to meet the charges upon which he was tried could not have been cured by a motion for a continuance or the granting of a continuance. I will reserve the remainder of my time.
Earl Warren: You may Mr. Messerman. Mr. Conway.
Leo J. Conway: Mr. Chief Justice, may it please this Honorable Court. There's no more frustrating a problem that confronts a lawyer than being called upon to defend a client who has no defense. A client who is one of three codefendants, two of whom already have pleaded guilty and who -- although he is unable to assist his attorney in presenting any kind of a defense refuses to acknowledge his guilt.
Earl Warren: What was that last -- I didn't hear it. I didn't understand that statement.
Leo J. Conway: I am -- Mr. Chief Justice, I mean this. That this man was brought -- he was in jail and he had an attorney appointed to defendant. The attorney went to the jail. He asked the man to indicate to him how he was to defend the case, “Who are your witnesses? What defense do you have?” And, the man says, “I have no defense that I know of because at the time that these things were -- occurred I was a victim of alcoholic amnesia. I don't remember a thing about it. I do feel that because I do not remember what happened at this time that I refuse to plead guilty.” But that was the situation that this attorney found himself in when he was required --
Abe Fortas: (Inaudible)
Leo J. Conway: -- to present some sort of a defense for the petitioner in this case.
Earl Warren: He also found this in a mental hospital too, didn't he?
Leo J. Conway: He had found that because of the drinking that had gone on after he had been incarcerated in a federal penitentiary because of -- as a result of another crime that was committed, the federal authority saw it fit to send him to the Springfield Hospital in the hopes that they may -- might cure him in this mental or this alcoholic problem that he had.
Earl Warren: You mean he'd been drinking in the penitentiary?
Leo J. Conway: He had apparently Your Honor indicated two penitentiary people that he had this alcoholic habit which he hoped to overcome and that was the basis (Voice Overlap) --
Earl Warren: Because he is -- you don't mean he was carrying on the habit in the penitentiary, do you?
Leo J. Conway: I have no knowledge of that, You Honor.
Earl Warren: I understood you to say that he'd --
Leo J. Conway: No, I -- if I'd --
Earl Warren: Well, I suppose it was sometime between the time that he was convicted that -- between the time he was arrested and went to jail and the time he was convicted and sent to a penitentiary, wasn't it?
Leo J. Conway: Well, he claimed that at the time that the offenses were committed, prior to the time that he went to the federal penitentiary --
Earl Warren: Yes.
Leo J. Conway: -- that he was intoxicated to the point where he did not know what he was doing. After these crimes were committed, he and the two codefendants went to New York and finally he and one of them ended up in Florida. And in Florida he was then picked up for stealing the automobile that they had gone to Florida then and was tried under the Dyer Act and that's how he happened to be in the federal penitentiary.
Earl Warren: Is all that in the record?
Leo J. Conway: I think that for the most part it is, Your Honor. It's -- I'm not sure whether or not this particular incident is in the record, but the fact that he was in the federal penitentiary as a result of the incarceration as a result of the Dyer Act conviction is in the record, yes sir.
Earl Warren: Yes, but these other things you're telling me about that he said he had no defense he knew of and so forth.
Leo J. Conway: I believe that --
Earl Warren: Is that in the record?
Leo J. Conway: -- that in my brief, it is mentioned.
Earl Warren: I beg your pardon?
Leo J. Conway: In my brief it is mentioned.
Earl Warren: In your brief, but that isn't the record.
Leo J. Conway: Yes sir.
Earl Warren: Why isn't it in the record if that's what you're relying on?
Leo J. Conway: Well, may it please the Court. I made no effort to rely upon this. I gave you that answer --
Earl Warren: (Inaudible)
Leo J. Conway: -- in reference to a question that you asked me.
Earl Warren: No, you told us -- as I understood, you told us that at the outset, you're dealing here with a man who went -- was assigned a lawyer whom he told he had no lawyer, that he'd been drunk and did all of these things --
Leo J. Conway: That is in the record, Your Honor.
Earl Warren: Yes.
Leo J. Conway: That part is in the record. It's in page 55 of the record --
Earl Warren: Go ahead.
Leo J. Conway: -- in which his counsel brings this fact out to the Court in litigation. I'm sorry if --
Earl Warren: What was left --
Leo J. Conway: -- I didn't understand --
Earl Warren: -- at the trial? Was that at the trial or was it (Voice Overlap) --
Leo J. Conway: That was at the trial.
Earl Warren: -- on habeas corpus?
Leo J. Conway: That was at the trial, Your Honor.
Earl Warren: What page you say?
Leo J. Conway: 55 of the record.
Hugo L. Black: That was when he's being sentenced?
Leo J. Conway: Yes, sir. When the -- may I proceed, Your Honor?
Earl Warren: Well, oh, of course, yes, go right ahead.
Leo J. Conway: Well, the petitioner refused to enter a plea of guilty. He apparently did agree with his counsel that he should waive a trial by a jury because he signed a waiver of trial by jury in writing and then at the outset of the proceedings of colloquy as Mr. Messerman indicated, was held by the Court. And for the first time the question of a prima facie case was brought out by defense counsel himself who said, “May it please Your Honor, this case is before this Court on a prima facie case.” That's at page 22 of the record -- page 21 of the record. Now at this time there was a colloquy between the Court and the counsel and in the presence of the petitioner himself. And the Court indicated at the outset that under this sort of an arrangement there would be no cross-examination of witnesses. At that point, the defense counsel indicated to the Court that he felt that if something new was brought out that he should be allowed to cross-examine. The Court then indicated that he felt that the state should be protected from being surprised in the middle of a case and that we ought to determine here at the outset just exactly what the proceedings would be. I think in all fairness, this Court was attempting to adopt a set of rules for the conduct of this Court to -- of this trial that everyone understood and it would provide one fair trial for the defendant and also a fair trial for the state.
Earl Warren: We'll recess now.